The financial system is losing liquidity: what this means for Bitcoin
The market is entering a new phase, and signals from traditional finance are forcing a reassessment of conventional strategies. Two independent analysts are simultaneously pointing to a fundamental shift that could have serious implications for all risk assets, including Bitcoin.
Liquidity is draining — markets are running out of fuel
One analyst, known under the pseudonym Bull Theory, notes an alarming trend: the excess liquidity indicator in the U.S. financial system has turned negative for the first time since 2021. This indicator is calculated as the difference between the growth rate of the money supply, inflation, and economic growth. It is this "remainder" that traditionally fuels stock markets. Currently, it simply does not exist.
When excess liquidity dries up, money typically flows from stocks into long-term bonds. The yield curve flattens, and historically, this foreshadows a weakening of stock returns over the next 3–6 months. Notably, according to the analyst, the new Fed Chair Kevin Warsh is not the root cause of this shift — the market has been pricing in tightening all year, and the regulator is merely "catching up."
The situation is exacerbated by overheated valuations. Stocks are currently expensive relative to bonds in a way that has only occurred in the rarest moments over the past half-century — the indicator has only been above current levels in 5% of cases. Paradoxically, against this backdrop, retail investors continue to actively buy stocks: U.S. equity exchange-traded funds saw the second-largest weekly inflow in history. It appears that the money which typically supported prices is disappearing, and retail is entering precisely when this support has vanished.
The 40-year bond bull market is over
Another analyst, Thierry Borger, offers a different perspective on the issue. In his view, the main event is not happening with stocks or cryptocurrencies, but with bonds, which lie at the core of almost every "safe" portfolio.
Borger reminds us: in 1981, bond yields reached 14%, and by 2020, they had fallen to 0%. This was 39 years of declining rates, ending in the panic of the COVID-19 pandemic. At that time, the system "flooded" itself with liquidity, and the forty-year bond bull market quietly concluded precisely when everyone felt saved.
According to him, this reversal is not the end of the game, but the beginning of a much more interesting one. For forty years, falling rates lifted all assets together, and passive ownership of "the entire market" outperformed the skill of selection. Now that the trend has reversed, valuation, balance sheet quality, and real cash flow are once again taking center stage. Borger cites JPMorgan data: at current valuations, the annualized return of the S&P 500 index could be around zero over a ten-year horizon, which, in his opinion, makes the market a rich field for the active investor.
What does this mean for Bitcoin?
For Bitcoin, both signals primarily carry short-term risk. If liquidity dries up and conditions tighten, Bitcoin, as a liquidity-sensitive risk asset, risks coming under pressure alongside overvalued stocks.
However, in Borger's logic, there is also a flip side: if the old model of "buy the index and hold" stops working, and traditionally safe bonds lose their status as a safe haven, some capital may eventually seek alternatives outside traditional markets. In such a scenario, Bitcoin could compete for a role as one of the assets of a new era, although this will not happen immediately and is far from guaranteed.
Expert opinion: We are witnessing a classic transition from the era of "cheap money" to a regime where liquidity becomes a scarce resource. For Bitcoin, this means increased volatility in the coming quarters. However, it is precisely in such periods that the cryptocurrency has a chance to prove its worth as a non-correlated asset — if it can attract capital fleeing from traditional instruments.