With Bitcoin trading sideways over the past few months, traders are waiting for their signal to re-enter the market before crypto reclaims its bullish momentum from earlier this year.

In a Wednesday memo, an analyst from CryptoQuant highlighted one signal worth looking at: stablecoin liquidity.

Stablecoins: The Key To Driving Bitcoin Higher

“The bottom line is that in order for #Bitcoin to rally in earnest, we need to see an increase in stablecoin liquidity and circulating supply” wrote analyst Mac.D to CryptoQuant.

According to the author, Bitcoin hasn’t been able to break new highs above $73,700 since mid-March 2024 due to tightening monetary policy conditions in the United States for the preceding two years.

Higher interest rates around the globe harmed liquidity across the economy, including both stablecoin liquidity and the total circulating stablecoin supply.

Stablecoins are the fiat currency pegged crypto tokens that exchanges use as dollar equivalents in the crypto trading economy, and which traders often hold in preparation to buy BTC at a later time.

Tether (USDT) – the world’s most popular stablecoin which is pegged to the US dollar – saw its market cap contract from $83 billion in April 2022 to $65 billion in November 2022.

Its total value quickly recovered to over $82 billion in Q2 2023, and steadily climbed again to over $112 billion over the past three quarters, rising alongside Bitcoin’s price during these periods. That said, total stablecoin liquidity has remained mostly flat during Q2 2024, and so has Bitcoin’s price.

Liquidity Conditions And Bitcoin’s Price

“The reason why the price of Bitcoin has been rising over the past year is, first, the expectation of lower interest rates and, second, the fact that fiscal policy, unlike monetary policy, has continued to bring liquidity into the market,” the analyst wrote.

In a recent essay, BitMEX co-founder Arthur Hayes argued that continued fiscal spending from the U.S. government is here to stay, which will keep pushing up prices for assets like Bitcoin.

Still, analyst Mac.D believes the market’s next leg-up will also require more “accommodative monetary policy” in the United States. Right now, markets predict that the Federal Reserve may only begin cutting interest rates in September.

“Until we see these signals, Bitcoin is likely to trade sideways or correct further, and investors would be wise to take a long-term view of the market,” Mac.D concluded.