The end of the "cheap money" era: what awaits bitcoin in the new reality
The financial system is undergoing a tectonic shift that could fundamentally change the rules of the game for all asset classes, including Bitcoin (BTC). The key indicators I track suggest that the era of excess liquidity, which fueled market growth over the past few years, is coming to an end. This creates a unique set of risks and opportunities for cryptocurrencies.
My analysis shows that the measure of excess cash in the financial system, calculated as the difference between money supply growth, inflation, and economic growth, has turned negative for the first time since 2021. In practice, this means there is no longer any "extra" money that typically flows into stocks and risk assets. Historically, such tightening has preceded a weakening in stock returns over a 3-6 month horizon. It is important to understand that this is not a result of actions by the new Fed leadership, but rather a delayed reaction to the tightening that markets have been pricing in over the past year.
The situation is exacerbated by the extreme overvaluation of stocks relative to bonds. The current level of this indicator has only been observed in 5% of cases over the past half-century. Paradoxically, as liquidity disappears, retail investors continue to set records for purchases — inflows into US stock exchange-traded funds were the second largest in history. This is a classic sign that the crowd is entering the market precisely when its fundamental support is vanishing.
The 40-year bond cycle is over
From my perspective, the most important event is not happening in the stock or cryptocurrency markets, but in the "safe haven" — the bond market. Yields on long-term US Treasuries have gone from 14% in 1981 to nearly 0% in 2020. This 40-year bull trend ended during the pandemic shock, when the system literally flooded itself with liquidity. Now the trend has reversed.
This marks the end of the era of passively owning "the whole market," where a buy-and-hold strategy guaranteed profits thanks to constantly falling rates. In the new reality, fundamental analysis, assessment of balance sheet quality, and real cash flow come to the forefront. JPMorgan, for example, estimates the potential ten-year return of the S&P 500 index at current prices to be near zero. This turns the market into a field for active management and the search for alpha returns.
My conclusion for Bitcoin holders is mixed. In the short term, the tightening of liquidity and conditions creates a direct risk for BTC as a risk asset highly sensitive to liquidity. It could come under pressure alongside overvalued stocks. However, in the long term, if traditional "risk-free" assets cease to be so, and passive strategies lose their effectiveness, some capital will inevitably begin to seek alternatives. Bitcoin has the potential to become one such asset in the new financial paradigm, but this path will be rocky and by no means guaranteed.