Analysts reveal bullish case for Bitcoin as global liquidity rises

Many macroeconomic analysts argue that Bitcoin looks set to surpass its all-time high, helped by an increase in global liquidity.

In recent weeks, the global macrofinancial outlook has been signaling a shift. Over the weekend, Goldman Sachs economists announced they were lowering their estimate for the probability of a U.S. recession in 2025 from 25% to 20%.

The shift comes after the latest U.S. retail sales and jobless claims data were released, suggesting the U.S. economy may not be in as good shape as many feared.

Goldman Sachs analysts said that if the August employment report, expected to be released on September 6, continues this trend, the probability of a recession could fall to the previously held 15% level.

The possibility of such a development has increased confidence that the U.S. Federal Reserve could cut interest rates by 25 basis points in September.

Potential interest rate cuts have begun to affect markets, with U.S. stock indexes such as the S&P 500, Nasdaq Composite and Dow Jones Industrial Average posting their biggest weekly percentage gains of the year in the week ending August 16.

Alongside this relatively positive news for the US economy, global liquidity has begun to increase. Historically, increased liquidity and diminishing recession fears have often been catalysts for bullish trends in the crypto space.

So, let’s take a closer look at what’s happening globally and how these macroeconomic changes could impact Bitcoin (BTC) and the entire cryptocurrency market in the coming weeks and months.

Increased liquidity in global markets

To understand where BTC is headed, we need to examine the mechanisms behind the current liquidity surge and how it could impact the broader markets.

Liquidity flood in the US

In the US, the Treasury appears ready to inject a large amount of liquidity into the financial system. BitMEX co-founder and crypto industry figure Arthur Hayes recently wrote on Medium that this liquidity boost could push Bitcoin above its previous all-time high of $73,700. So why now?

One possible explanation is the upcoming presidential elections. Maintaining a strong economy is vital, and this liquidity injection could be a way to ensure favorable conditions as the election approaches.

So how exactly will this liquidity be injected? As Hayes notes in his analysis, the U.S. Treasury Department and the Fed have several powerful tools at their disposal.

First, there is the overnight reverse repurchase agreement mechanism, or RRP, which had a balance of $333 billion as of August 19, significantly lower than the peak of over $2.5 trillion in December 2022.

Hayes explains that the RRP should be viewed as a large pool of “sterilized money” on the Fed’s balance sheet that the Treasury is explicitly trying to put into the “real economy” – that is, to add liquidity. The RRP represents the amount of Treasury securities that the Fed sells under agreements to repurchase in the future. In the process, the institutions that purchase them – namely the money market funds – earn overnight interest on their cash.

Overnight repurchase agreements | Source: FRED

As Hayes noted, the decline in the overnight RRP over the past year suggests that money market funds are moving their cash into short-term T-bills instead of RRPs, because T-bills pay slightly more interest. As Hayes noted, T-bills are “leveraged in nature and will create credit and asset price appreciation.” In other words, money is coming off the Fed’s balance sheet and adding liquidity to the markets.

Hayes also noted that the Treasury plans to issue $271 billion worth of new Treasury bills by the end of December.

But that’s not all. The Treasury also has access to the TGA, the government’s general account, which is essentially its checking account. This account holds a staggering $750 billion that can be released into the market under the guise of preventing a government shutdown or other financial need. The TGA can be used to finance the purchase of non-Treasury debt. As Hayes explains, “If the Treasury increases the supply of Treasury bonds and decreases the supply of other types of debt, it is netly adding liquidity.”

If both of these strategies are implemented as Hayes claims, between $301 billion (RRP funds) and $1 trillion could be pumped into the financial system before the end of the year.

So why is this important for Bitcoin? Historically, Bitcoin has shown a strong correlation with periods of increased liquidity.

With more money circulating in the economy, investors tend to take on more risk. Given Bitcoin’s status as a risk asset and its limited supply, Hayes argues that increased liquidity means a bull market can be expected towards the end of the year.

If the US continues these liquidity injections, we could see a strong increase in the price of Bitcoin as investors flock to the cryptocurrency market in search of higher returns.

China’s liquidity movements

While the US is increasing its liquidity efforts, China is also making some moves, albeit for different reasons.

The Chinese economy is showing signs of strain, with the latest data showing the first contraction in bank lending in 19 years, according to a recent X-series by macroeconomic analyst TomasOnMarkets. That’s a big deal because it shows that China’s economic engine, one of the world’s main growth drivers, is stumbling.

🇨🇳 Liquidity injections to China are increasing

The People’s Bank of China (PBoC) is ramping up its stimulus.

Mid-sized Reverse Repo injections are continuing and total PBoC liquidity injections are moving above my “watch out” line ($65 billion), but not yet definitively continuing… pic.twitter.com/n0Md8Kga6D

— Tomas (@TomasOnMarkets) August 15, 2024

To counter the pressure, the People’s Bank of China has been quietly ramping up liquidity injections. In the past month alone, the PBoC injected $97 billion into the economy, mainly through the same reverse repo operations.

While these injections are still relatively small compared to what we have seen in the past, they are vital at a time when China’s economy is at a turning point.

But there’s more at stake here. The analyst said the top leadership of the Communist Party of China has pledged to take additional policy measures to support the economy.

These measures could include more aggressive liquidity injections, which could further increase the money supply and potentially stabilize the Chinese economy.

The yuan has been strengthening against the US dollar over the past few weeks, which could give the People’s Bank of China more room to maneuver and implement additional stimulus without triggering inflationary pressures.

The overall picture of global liquidity

What is particularly interesting about these liquidity movements is that they do not appear to occur in isolation.

Jamie Coutts, chief crypto analyst at Real Vision, noted that central banks, including the Bank of Japan, have injected significant amounts of money into the global monetary base over the past month, with the Bank of Japan alone adding $400 billion to it.

Central banks are surrendering, liquidity taps are being opened and #Bitcoin is about to rise much higher.

My composite global liquidity momentum model (MSI) has provided the first Bullish regime signal since November 2023. Recall that Bitcoin is up 75% since November… pic.twitter.com/ovF6qSHX8c

— Jamie Coutts CMT (@Jamie1Coutts) August 15, 2024

Add in the $97 billion from the People’s Bank of China and the $1.2 trillion expansion in the global money supply, and it appears to be a coordinated effort to inject liquidity into the global economy.

One factor supporting this idea of ​​coordination is the recent decline in the U.S. dollar. The dollar’s ​​weakness suggests that the Federal Reserve may be in tacit agreement with these liquidity measures, allowing for a more synchronized approach to stimulating the global economy.

Jamie added that Bitcoin’s recovery potential is very high when comparing with previous cycles. In 2017, during a similar period of liquidity expansion, Bitcoin recovered 19 times. In 2020, it increased 6 times.

While it seems unlikely that history will repeat itself in exactly the same way, the analyst argues that if the global money supply continues to expand and the US dollar index (DXY) falls below 101, there is a strong case for Bitcoin to increase in value 2-3x during this cycle.

Where could the BTC price go?

On August 5, Bitcoin and other crypto assets experienced a sharp decline due to a market crash triggered by rising recession fears and the sudden withdrawal of yen carry trades. The impact was severe, with Bitcoin falling to as low as $49,000 and struggling to recover.

As of August 19, Bitcoin is trading around $59,000 and is facing strong resistance between $60,000 and $62,000. The key question now is: where will Bitcoin go from here?

BTC 1-day price chart over the last 6 months | Source: crypto.news

According to Hayes, Bitcoin needs to break above $70,000 and Ethereum (ETH) needs to break above $4,000 to truly enter the next bull phase. Hayes remains optimistic, saying, “The next stop for Bitcoin is $100,000.”

He believes that as Bitcoin rises, other major crypto assets will follow suit. Hayes specifically mentions Solana (SOL), predicting that it could rise 75% to reach $250, just below its all-time high.

One of those who supports this view is BitVaulty CEO Francesco Madonna, who also sees the current market environment as a harbinger of an extraordinary bullish period.

Madonna noted a pattern she has observed over the past decade: in times of uncertainty or sudden liquidity injections, gold is often the first to move due to its safe-haven status.

Gold’s recent all-time high is a development that Madonna interpreted as a leading indicator that the bull market for risky assets, including Bitcoin, has just begun.

2/3 Gold #Laugh I saw this and reached its ATH. Analyzing the last 10 years of behavior, Gold is usually the first mover in times of uncertainty or sudden liquidity injections due to its safe haven status. pic.twitter.com/5a3AUR4qAf

— Francesco Madonna (@CiccioMadonna) August 17, 2024

Madonna notes that after gold peaks, Nasdaq and Bitcoin usually follow suit, especially as liquidity stabilizes and investors seek higher returns in growth assets.

Considering that gold has reached a new all-time high, Madonna thinks that Bitcoin’s recent consolidation around $60,000 could be the calm before the storm, with $74,000 being just “the beginning” and $250,000 potentially within reach.

4/4 This pattern has repeated itself over the last decade and longer, with gold often being a leading indicator of liquidity changes. The truth is #Laugh It has reached its ATH, it screams the bull market has just begun! 74k was just the beginning, #Bitcoin 250 thousand in sight! pic.twitter.com/SV0a1GreSL

— Francesco Madonna (@CiccioMadonna) August 17, 2024

As Coutts points out in his recent X paper, expansion of the money supply is a condition of a credit-based fractional reserve system like ours.

Without this expansion, the system risks collapse. The analyst argues that this “natural state” of continued growth in the money supply could be the catalyst that propels Bitcoin into the next major bull market, along with other growth and risk assets.

With the US, China and other major economies injecting liquidity into the system, demand for Bitcoin is likely to increase as investors seek assets that can outperform traditional investments.

If these liquidity measures continue as expected, Bitcoin could be on the verge of another significant rally that has the potential to surpass previous all-time highs and set new records.

Disclosure: This article does not provide investment advice. The content and materials contained on this page are for educational purposes only.