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Financial markets have witnessed a notable resurgence in risk-taking since the last quarter of 2022. Although there is a prevailing consensus that this trend will persist, certain observers urge vigilance due to indications of impending fiat liquidity pressures.
Bitcoin (BTC), the dominant cryptocurrency in terms of market value, reached its lowest point around $15,500 in November and has since experienced a remarkable recovery, doubling in value to $31,000. This impressive growth has been fueled, in part, by recent developments such as Fidelity's application for a spot Bitcoin ETF. Over the past two weeks alone, Bitcoin prices have surged by nearly 20%.
The Nasdaq index, which is heavily influenced by technology stocks on Wall Street, reached its lowest point in late 2022 and has since experienced a remarkable recovery, surging by almost 50%. Similarly, the broader S&P 500 index has gained 25% over the same period.
The situation has become more challenging recently, as widely monitored metrics of fiat liquidity, such as the Fed net liquidity indicator and the global net liquidity indicator, have started to decline, as reported by Lewis Harland, the Portfolio Manager of crypto fund Decentral Park Capital.
"Market liquidity measures (global, U.S. domestic) point lower and would be unusual for BTC to be constructive with both liquidity measures declining over coming weeks," Harland said in a market update on Monday.
"This is the single biggest reason we are cautious for BTC despite the bullish consensus market view and think this is being overlooked by investors," Harland added.
The liquidity conditions of fiat currencies play a crucial role in impacting risk assets such as bitcoin and stocks. Throughout history, changes in fiat liquidity conditions have often indicated important turning points in the market valuations of these risk assets.
The fiat liquidity measures have turned lower, signaling tough times for risk assets, including cryptocurrencies. (Decentral Park Capital)
Recent data from both TradingView and Decentral Park Capital reveal that the global net liquidity indicator, encompassing the fiat supply of significant economies, has plummeted to $26.5 trillion. This unfortunate development marks the indicator's lowest point since November 2022.
The Fed's net liquidity indicator, measuring the quantity of available U.S. dollars within the system, has decreased from $6.3 trillion a few weeks ago to $6 trillion.
Sven Henrich, the founder and lead market strategist at NorthmanTrader, and Douglas Orr, the Founder of Endeavour Equity Strategy, have both tweeted about the decline in bank reserves held at the Federal Reserve (Fed).
Banks utilize reserves to expand credit, so when reserves decrease, it signifies a tightening effect that can induce risk aversion.
The recent tweet reveals a decrease in the bank reserves held at the Federal Reserve over the past couple of weeks, raising doubts about the sustainability of the S&P 500 rally. This trend also holds true for bitcoin.
A comparable disparity can be observed between the MSCI All Country World Index (ACWI) and the aggregate assets of the five major central banks (the Fed, ECB, BOJ, PBOC, and BOE), which serves as an indicator of fiat liquidity.
The MSCI All Country World Index (ACWI) is a stock index designed to provide a broad measure of
global equity market performance. (Markets & Mayhem)
The aggregate balance of the five major central banks is once again decreasing, indicating liquidity strains for risky assets.
"We do see liquidity from central banks beginning to roll off, and that correlation with markets suggests that it may be a headwind moving forward. Particularly with [U.S.] Treasury issuance pulling more liquidity out of the market," pseudonymous macro trader and investors Markets & Mayhem said in Sunday's edition of the newsletter, noting the divergence between stocks and central bank balance sheets.
