What this means for your crypto wallet

As central banks around the world are cutting interest rates and injecting stimulus, how can you position your portfolio to benefit from the increase in liquidity? Read on.

Macroeconomic triggers deepen

Global liquidity is experiencing a sharp increase as central banks around the world, particularly China and the United States, adopt policies aimed at pumping money into their economies.

China recently announced a $143 billion stimulus package, creating strong economic momentum. Moreover, the People’s Bank of China has instructed commercial banks to reduce mortgage rates on existing home loans to at least 30 basis points below the loan interest rate by October 31; This was all done to support the struggling real estate market.

As a result, Chinese stocks went parabolic. In the past five days alone, the Shanghai Composite Index has increased by 20%, with an 8% increase recorded on September 30 alone.

ONLY: 🇨🇳 The Chinese stock market followed a PARABOLIC course this week.

+20% in 5 days
+8% today

– Government injects $140 billion in stimulus
– Multiple rate cuts.

The last 5 days have been CRAZY! pic.twitter.com/de4Qpai4lm

— Radar🚨 (@RadarHits) September 30, 2024

But it’s not just China. On September 18, the US Federal Reserve made an aggressive 50 basis point rate cut, and the market now expects another 25 to 50 basis point rate cut in November, according to the CME FedWatch Tool. In such a case, the federal funds rate could fall to the range of 4.25-4.50% or 4.50-4.75%.

Moreover, since the Federal Open Market Committee meeting on September 18, crypto assets have outperformed many traditional assets. Increased liquidity in both the US and China could likely increase investors’ appetite for riskier investments such as crypto in the near future.

Let’s take a deeper look at each of these events and explore how they could shape the future of the crypto market, specifically Bitcoin, in the coming days.

Global liquidity is increasing

Global liquidity stands out as one of the strongest indicators when it comes to understanding Bitcoin’s price movements.

Global liquidity or M2 supply refers to the money available, such as cash and bank deposits. When central banks ease policies by lowering interest rates or injecting stimulus into the economy, they increase the amount of money flowing through the system.

Over the years, Bitcoin has shown a strong correlation with liquidity; This means that when the global money supply increases, the price of Bitcoin tends to increase as well. Conversely, Bitcoin’s performance often declines when liquidity tightens.

According to a study by Lyn Alden Investment Strategy, Bitcoin’s correlation with global liquidity from May 2013 to July 2024 was an impressive 0.94. A correlation of 1.0 indicates perfect alignment, so 0.94 is extremely high.

BTC and global M2 supply correlation chart | Source: Lyn Alden

However, when zooming in on shorter time frames, a more complex picture emerges. Over a 12-month period, the correlation between Bitcoin and liquidity drops to 0.51, and after 6 months it drops further to 0.36.

Why is this the case? While liquidity is the main driver of Bitcoin’s long-term price movements, short-term fluctuations are often influenced by Bitcoin-specific events such as regulatory updates, market sentiment or critical crypto news. This explains why Bitcoin can sometimes deviate from the broader liquidity trend in the short term.

Currently the global liquidity picture is changing. After a period of contraction, the M2 money supply is growing rapidly again. US M2 supply, which contracted throughout much of 2022 and early 2023 due to the Fed’s tightening policies, saw one of its sharpest increases in recent months, reaching over $21 trillion in early September.

US M2 supply chart from 2022 | Source: FRED

Global M2 supply reached approximately $108 trillion as of the end of September, signaling a clear upward trend after months of stagnation.

Global M2 supply chart as of February 2024 | Source: BGeometrics

This increase in liquidity is critical because, as history shows, the price of Bitcoin often increases with increased liquidity. A similar situation occurred during the COVID-19 pandemic in 2020, when central banks, especially the Fed, injected large amounts of money into the economy. The supply of M2 increased and the price of Bitcoin did the same.

But in 2022, when the Fed began raising interest rates and withdrawing liquidity, M2 growth turned negative and the price of Bitcoin fell sharply.

The key takeaway is that Bitcoin is highly sensitive to liquidity conditions. Bitcoin will often benefit as global M2 supply increases. With the current increase in liquidity, especially in the US and China, another increase in Bitcoin prices may be on the horizon.

But as history shows, short-term fluctuations can deviate from this long-term trend. It is crucial to monitor both liquidity conditions and Bitcoin-specific factors to gauge where the price might go next.

drip effect

As global liquidity increases due to central bank actions around the world, this flow of capital slowly spreads through the economy and eventually finds its way into crypto markets.

The process begins with increased cash flow in traditional industries where businesses and consumers hold more capital. This increase leads to more spending and investment across various asset classes.

Initially, this liquidity flows into safer assets such as bonds, gold or real estate. These assets are often the first to benefit as investors seek to park their capital in more stable and established markets.

But as liquidity increases and confidence in the economy strengthens, the next phase begins: Investors begin to seek higher returns and shift their focus to riskier assets.

For example, over the past two decades, China has witnessed five major stock rallies, three of which resulted from major stimulus packages. Now, as the country launches a new round of economic stimulus, some analysts believe we may be at the beginning of a fourth boom.

There have been five major stock rallies in China in the last two decades, three of which were driven by stimulus. We may be at the beginning of the fourth stimulus rally, raising expectations for a 50-100 percent increase. pic.twitter.com/XqUklCOYRl

— Gavekal (@Gavekal) September 30, 2024

As investors become more comfortable with risk, they are starting to look beyond stock markets for greater returns. This is where crypto comes into play.

Assets like Bitcoin are viewed as high-risk, high-return investments. As more money flows through the financial system under the influence of central bank policies, some of this liquidity inevitably flows into the crypto space.

This process gradually emerges following economic growth, investor sentiment and the ongoing search for returns in a liquidity-rich environment.

Ultimately, this cascading effect from the economy to bonds, stocks, and eventually crypto shows how central bank policies can increase demand in the crypto space, making it a highly attractive destination for investors during periods of monetary expansion.

What do experts think?

Many experts believe that the combined forces of liquidity injections, economic stimulus and interest rate cuts are paving the way for risky assets like Bitcoin to come to the fore.

WeRate co-founder Quinten Francois offers a historically optimistic outlook, stating that ‘80% of Octobers are green’, citing both equity and crypto markets that tend to perform well in the fourth quarter.

80 percent of October was green

October, November and December were green in 100% of election years

In 100% of the years where September was green, October, November and December were green

4th quarter starts tomorrow pic.twitter.com/TQeN6CyJ4R

—Quinten | 048.eth (@QuintenFrancois) September 30, 2024

More interestingly, he points out that there is a green October, November and December period in every election year. What makes this even more interesting is that when September ends on a positive note, the last quarter tends to follow suit.

But not everyone is looking at the flood of liquidity through rose-tinted glasses. Economist and professor Daniel Lacalle took a more cautious approach.

Global net liquidity is exploding.

This means unprecedented monetary destruction, permanent economic stagnation and expansion of risky assets.

via Bloomberg pic.twitter.com/sA1jRMjWSC

— Daniel Lacalle (@dlacalle_IA) September 29, 2024

While liquidity is indeed ‘exploding’, this is not necessarily good news, he warns. Lacalle warns that this massive influx of cash could lead to ‘unprecedented monetary devastation’.

According to Lacalle, increased liquidity could eventually fuel inflation, economic recession, and asset bubbles; These risks can harm even strong-performing markets like crypto over the long term.

Meanwhile, Yona Network CEO Max Sultakov shared exclusive information with crypto.news, highlighting the role of liquidity in increasing the price of Bitcoin.

“Historically, Bitcoin has risen during periods of global liquidity expansion,” Sultakov said. He believes that ‘institutional investors will likely shift more capital into Bitcoin and crypto as a hedge against fiat instability.’

Another important factor to consider, according to Sultakov, is the role of decentralized assets in regions with tight capital controls, especially in China.

”In China, crypto is not just an investment, but a lifeline that will move wealth away from the reach of the state.”

As liquidity increases in these markets, people may turn to decentralized assets like Bitcoin to preserve wealth outside the control of the government.

From a macro perspective, Fed Chairman Jerome Powell recently signaled that more rate cuts are on the way, but they will likely be smaller than the last 50 basis point cut.

With US interest rates still hovering around 4.8% and the long-term target being 3%, Powell explained that ‘this will mean two more rate cuts, but not more than 50’, suggesting the Fed will tread carefully to prevent the economy from overheating. He stated that he threw it.

For crypto, this means capital flows into risk assets may increase as liquidity continues to increase. However, the balance between inflation and economic stability remains a critical factor to monitor.