The Stablecoin Supply Ratio (SSR) is the ratio of the market cap of bitcoin divided by the market cap of all stablecoins in terms of BTC. The ratio examines the relationship between bitcoin and stablecoins, specifically the buying power of stablecoins.
When the price of bitcoin is low, a given supply of stablecoins can buy a large portion of the bitcoin supply and push the price higher. In this case, the buying power of stablecoins is high.
However, once the bitcoin price goes higher and higher, for that same supply of stablecoins can only buy less BTC, reducing the ability of stablecoins to push the price higher. In this case, the buying power is low for stablecoins. Freshly issued stablecoins are required to increase the buying power.
The Stablecoin Supply Ratio therefore estimates the ability of stablecoins to move the price of bitcoin and is related to two factors: the price of bitcoin and the supply of all stablecoins.
If the price of bitcoin falls while the market capitalisation of all stablecoins remains constant, then the Stablecoin Supply Ratio falls as well. However, if the price of bitcoin rises, then the Stablecoin Supply Ratio will rise as well. If the supply of stablecoins increases due to issuance events, then the Stablecoin Supply Ratio will fall.
Low Stablecoin Supply Ratio values are associated with strong buying power for stablecoins, meaning there is more potential for them to move the price of bitcoin. On the other hand, high Stablecoin Supply Ratio values are associated with weak buying power for stablecoins. Even if sentiment is bullish, when there is a high Stablecoin Supply Ratio it becomes more difficult to push the price of bitcoin higher.
The Stablecoin Supply Ratio can be charted on CQ.Live and Glassnode, with the chart below showing the ratio from Glassnode. If we look at May 2018, we see that the ratio was high just below 90%, meaning the existing supply of stablecoins could only buy (1/90) = 1% of the bitcoin supply. Hence, buying power was weak and high values of the Stablecoin Supply Ratio coincide with local tops in the price of bitcoin.
On the other hand, the ratio fell to a low near 20% in late 2018 which coincided with a bottom in the price of bitcoin. At this point, the total supply of stablecoins could buy approximately 5% of the BTC supply and buying power for stablecoins was strong, setting the stage for a bullish run fueled by the exchange of stablecoins into bitcoin and hence pushing the price higher.
The weakness of the Stablecoin Supply Ratio is that it does not account for bitcoin derivatives trades or trades with fiat currencies. Therefore, the ratio should be used in conjunction with other indicators or combined with fundamental/sentiment analysis to produce more reliable signals.