Bitcoin and Global Liquidity: Is It Following or Leading?

Bitcoin's recent decline may be a “pre-emptive deployment” of future liquidity crunch, and this article will explore Bitcoin's relationship to global liquidity. This article is based on an article by Michael Nadeau and was compiled, compiled and contributed by Foresight News. (Synopsis: Standard Chartered: Bitcoin has a good chance of falling below $100,000 in the short term!) Don't miss the last chance of the bull market) (Background added: Why is gold up so much more than Bitcoin this year, but I'm not worried about BTC? There are many tools and frameworks to understand the price movement of Bitcoin, such as the currency quantity equation (MV = PQ), inventory flow ratio, network value to transaction volume ratio, network value to Metcalfe's law ratio, realized price to market capitalization ratio, production costs, and so on. But in the current market, everything ultimately comes down to liquidity conditions. In this article, we'll explore Bitcoin's relationship to global liquidity: Is Bitcoin really “lagging” behind global liquidity? Bitcoin and Global Liquidity Source: Global Liquidity Indexes* According to the Global Liquidity Indexes study: “Historical data shows that changes in liquidity tend to trigger changes in the prices of risky assets, with a lag period of about 3 months. Specifically, risky assets typically perform better when global liquidity increases; Reduced liquidity tends to signal weaker asset prices.” In addition, Raoul Pal of Global Macro Investor said that global liquidity can explain 90% of bitcoin price fluctuations. So what about the current data? – Global liquidity grew at a three-month annualized rate of 10.2%; – Global liquidity is currently growing at an annual rate of 6%. Source: Global Liquidity Indexes* According to this data and logic, Bitcoin should continue to rise, right? From the data and the conventional narrative, the conclusion seems so. But in the first two cycles, global liquidity continued to expand for quite some time after Bitcoin reached its top. Source: Global Liquidity Indexes* This phenomenon contradicts the common saying that the price of Bitcoin lags behind liquidity. Let's pause and start with the question: why is Bitcoin lagging behind liquidity conditions? After all, the market is forward-looking; And Bitcoin is traded 24 hours a day a day in the global market, so why is it lagging behind liquidity, a key price-related variable recognized by market participants? In fact, we think Bitcoin is leading the way in global liquidity, especially at the top of the market cycle. **Why? We believe that the market is reflecting the trend of tightening liquidity in advance, and it can sniff out the next changes. But at the bottom of the market (bear market), the opposite is true, and global liquidity tends to lead Bitcoin. **Why? Because in bear markets, markets usually wait for clear signals from monetary and fiscal authorities before acting. It should be noted that we have not yet confirmed this view through quantitative analysis, but by analyzing the charts, we can support this judgment. Assuming that global liquidity will expand again after Bitcoin reaches its top, our core task is to identify the catalysts that led to the decline in global liquidity. In the last cycle, the catalyst was high inflation and the Fed being forced to raise interest rates quickly, which is why the market “pre-deployed” in November 2021, when the liquidity contraction was driven by central bank monetary policy. So what could be the catalyst for this cycle? In the current cycle, the pressure to tighten liquidity may not come from the Fed, which markets expect to cut interest rates in October and December, but from fiscal policy. Expected Fiscal Impact: Tariff Increases and BBB Spending Cuts **Expected Tariff Revenues**: Assuming a 13% tariff rate, an estimated $380 billion in additional tariff revenue per year. The chart below shows the impact of tariffs so far. *Source: Fed Economic Database* This will result in private sector liquidity being withdrawn and returned to public sector fiscal accounts. In our view, this move will bring deflationary pressures, if not deflation. Spending cuts: The Congressional Budget Office (CBO) expects $1.2 trillion to $1.3 trillion in spending cuts over the next decade, including Medicaid reform and Supplemental Nutrition Assistance Program (SNAP) budget cuts, equivalent to about $125 billion in annual spending cuts. Adding up tariff increases and spending cuts would add up to $505 billion in fiscal austerity annually, or 1.7 percent of U.S. gross domestic product. However, in 2026, the United States will implement effective tax cuts for businesses, including tax exemptions on tip income, while spending an additional $35 billion a year on infrastructure, defense, rural hospitals, NASA, and more. These measures may offset the fiscal austerity caused by tariff and spending cuts, but will they be effective? If Bitcoin does lead liquidity again at the top of the cycle, then we believe that what it is currently “pre-deploying” is the negative impact of fiscal policy tightening on liquidity. You may often hear Bescent mention in interviews: “We want to stimulate the economy through the private sector.” We agree in this direction, but the process of achieving this goal can be full of twists and turns. That's why the Trump administration has insisted on deep interest rate cuts in order to bridge the gap for our transition to a new economic model. Banking Liquidity In addition to the underlying fiscal policy changes described above, we also observe that banking liquidity is tightening. The chart below shows that we can see a growing imbalance between liquidity and available collateral between market maker banks during overnight funding sessions. This suggests that the money market is facing a liquidity shortage, with market makers either short of cash or collateral. This phenomenon is consistent with the following factors: – fiscal austerity; – The Fed continues to reduce its balance sheet; – Reconstruction of the general account balance of the Ministry of Finance. Source: Global Liquidity Indexes* As these factors ferment, bank reserves are approaching the shortage level set by the Fed. Source: @fwred All indications are that trouble is brewing, and the performance of the bond market seems to confirm this. Summary It is clear that at the top of the first two cycles, Bitcoin led the way in global liquidity. In the 2021 cycle, Bitcoin sniffed out the trend of high inflation and interest rate hikes in advance; At that time, the Biden administration was promoting the transition of the economy to a fiscally dominant model, which is the core factor driving bitcoin liquidity in this cycle. So what now? We are gradually withdrawing from the fiscal dominance model. In our view, risk assets could be negatively impacted during this transformation. Related reports Standard Chartered Bank: Clearing 19 billion in the crypto market is a good thing, paving the way for an additional $200,000 in bitcoin The mysterious whale BitcoinOG transferred more than $500 million in bitcoin, shorting $220 million, there are ghosts in the market? Gold's epic single-day plunge of 6% “safe-haven market crash”, experts warn: the next turn of Bitcoin? Bitcoin and Global Liquidity: Follow or Lead? 〉This article was first published in BlockTempo's "Dynamic Trend - The Most Influential Blockchain…