Storm Clouds Ahead: Bitcoin’s Bullish Stance Faces Fiat Liquidity Headwinds

• Bitcoin’s value, despite a recent surge, might face significant obstacles due to declining fiat liquidity indicators like the Fed net liquidity indicator and the global net liquidity indicator.
• Risk assets, including Bitcoin and stocks, are heavily influenced by fiat liquidity conditions, suggesting that the turning points in these conditions often align with significant market value peaks and bottoms for these assets.

The latter part of 2022 witnessed a strong return of risk-taking within financial markets. However, amidst this upbeat consensus, some industry observers are advising caution. Prominent indicators predict forthcoming pressures on fiat liquidity, potentially impacting the market dynamics of Bitcoin (BTC), the foremost cryptocurrency by market capitalization.

After bottoming out near $15,500 in November, Bitcoin has rallied to $31,000, nearly doubling its value. This increase, including a near 20% rise over the past two weeks alone, can be attributed to market influences such as Fidelity applying for a spot-bitcoin ETF.

Analysing Fiat Liquidity and Market Dynamics

Correspondingly, Wall Street’s tech-centric Nasdaq index, which also bottomed out in late 2022, has seen nearly a 50% rally since. Meanwhile, the broader S&P 500 index has grown by 25% in the same period.

Despite these bullish trends, upcoming challenges have been noted. Key fiat liquidity metrics, such as the Fed net liquidity indicator and the global net liquidity indicator, have started to show a decline, warns Lewis Harland, Portfolio Manager at crypto fund Decentral Park Capital.

According to Harland, it would be unusual for Bitcoin to remain bullish while these liquidity measures point lower. He highlights this as a crucial reason for exercising caution with Bitcoin, despite the bullish market consensus.

Fiat liquidity conditions exert a considerable influence on risk assets like Bitcoin and stocks. Historical analysis indicates that turning points in fiat liquidity conditions often coincide with significant peaks and bottoms in the market valuations of these risk assets.

The global net liquidity indicator, which accounts for the fiat supply of several key economies, has diminished to $26.5 trillion, the lowest since November 2022. Simultaneously, the Fed net liquidity indicator, a measure of U.S. dollars available within the system, has slid from $6.3 trillion to $6 trillion.

Bank reserves at the Federal Reserve (Fed) have also shown a decline, as mentioned by Sven Henrich, founder and lead market strategist at NorthmanTrader, and Douglas Orr, Founder of Endeavour Equity Strategy. This contraction signifies a tightening and can lead to risk aversion, which may cast a shadow over the sustainability of the S&P 500 rally, and Bitcoin as well.

Similar divergences are evident in the MSCI All Country World Index (ACWI) and the total assets of the big five central banks (the Fed, ECB, BOJ, PBOC, and BOE), which are also crucial indicators of fiat liquidity. With the combined balance of these central banks contracting, liquidity pressures on risk assets are indicated.