Liquidity is drying up, the era of bonds is over: what this means for bitcoin
The financial system is undergoing a fundamental shift that could rewrite the rules of the game for all asset classes, including Bitcoin. Two independent analytical signals indicate that the familiar paradigm, based on an abundance of cheap money, is coming to an end.
The Disappearance of Excess Liquidity
A key indicator — the measure of excess cash in the financial system — has turned negative for the first time since 2021. This metric is calculated as the difference between the growth rate of the money supply and the sum of inflation and economic growth. This "residual" has traditionally fueled the growth of stock markets. It is now gone. When this indicator turns negative, capital typically flows from stocks into long-term bonds, which has historically preceded a weakening of stock returns over the next 3 to 6 months.
Notably, the current tightening is not an initiative of the new Fed leadership — the market has been pricing in this scenario throughout the year, and the regulator is merely catching up with reality. Against this backdrop, stock valuations appear extremely expensive compared to bonds: the current level of distortion has been observed in only 5% of cases over the past half-century. Nevertheless, retail investors continue to actively buy stocks, showing record inflows into exchange-traded funds. This is a classic sign that the crowd is entering the market precisely when the fundamental support in the form of liquidity has already disappeared.
The End of the 40-Year Bond Bull Market
The second, even deeper signal concerns the bond market. Yields on long-term U.S. government bonds peaked at 14% in 1981 and steadily declined to near-zero levels by 2020. This 39-year trend of falling rates ended during the pandemic panic, when the system flooded itself with liquidity. That trend has now reversed, and we stand on the threshold of a new era where passive ownership of "the entire market" will no longer yield easy profits.
In this new reality, fundamental valuation, balance sheet quality, and real cash flow come to the forefront. According to JPMorgan calculations, at current valuations, the return on the S&P 500 index over a ten-year horizon could trend toward zero. This makes the market extremely challenging for the passive investor but opens up enormous opportunities for active management.
Risk and Opportunity for Bitcoin
For Bitcoin, these signals carry a dual nature. In the short term, the risks are obvious: as a risk-on asset sensitive to liquidity, BTC could come under pressure alongside overvalued stocks. If liquidity dries up and conditions tighten, Bitcoin risks experiencing a correction.
However, in the long term, within the logic of a changing era, there is also a flip side. If the old "buy and hold the index" model stops working, and traditional "safe" bonds lose their status as a safe haven, some capital may eventually begin to seek alternatives outside traditional markets. In such a scenario, Bitcoin has the potential to become one of the assets of the new era, although this will not happen immediately and is by no means guaranteed.
Analyst's Opinion: The market is entering a phase where adaptability and active choice will be valued more than passive ownership. For Bitcoin, this means that its narrative as "digital gold" and a hedge against the traditional financial system could receive new, more substantial confirmation, but only after the market goes through a painful phase of reassessing all risks.