Monetary liquidity is drying up, and the era of bonds is coming to an end: what this means for Bitcoin
The financial system is undergoing a tectonic shift that could fundamentally change the rules of the game for all asset classes, including Bitcoin. Two independent analytical signals simultaneously indicate that the familiar model of "cheap money" and multi-year bond growth is becoming a thing of the past, creating unique risks for the cryptocurrency market.
Where is the liquidity? The indicator turns negative for the first time since 2021
A key indicator — the measure of excess liquidity 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. It is this "residual" that has traditionally fueled stock markets, flowing into equities and risk assets. That flow is now gone.
When this indicator goes negative, capital has historically flowed from stocks into long-term bonds. The yield curve flattens, and this pattern has typically preceded a weakening of the stock market over the following 3–6 months. Notably, the new Fed chair is not the root cause here — the market itself has been pricing in tightening all year, with the regulator merely "catching up."
Adding to the concern is the overheating of valuations. Stocks are currently expensive relative to bonds in a way that has occurred only 5% of the time over the past half-century. Against this backdrop, retail investors continue to actively buy stocks, recording the second-largest weekly inflow into US exchange-traded funds in history. This creates a paradox: the support that usually underpinned prices is disappearing, yet retail investors are entering precisely at this moment.
The end of the 40-year bond bull market
The second, deeper signal concerns the bond market. Since 1981, when long-term US bond yields reached 14%, a 39-year trend of falling rates began, ending near zero in 2020 during the COVID-19 pandemic. It was then that the system "flooded" itself with liquidity, and the 40-year bond bull market quietly concluded at a moment of widespread relief.
This reversal is not the end of the game but the beginning of a far more interesting era. Forty years of falling rates lifted all assets together, making passive ownership of "the entire market" a winning strategy. Now that the trend has reversed, valuation, balance sheet quality, and real cash flow come to the forefront. Data from JPMorgan shows that at current valuations, the S&P 500 index's return over a ten-year horizon could trend toward zero, making the market a rich field for active investors.
Risks for Bitcoin and the new paradigm
For Bitcoin, both signals primarily carry short-term risk. If liquidity dries up and conditions tighten, BTC, as a liquidity-sensitive risk asset, risks coming under pressure alongside overvalued stocks.
Expert opinion from Cryptalist: However, there is a flip side to the logic of the bond era reversal. If the old model of "buy the index and hold" stops working, and safe-haven bonds lose their status as a quiet refuge, some capital may eventually seek alternatives outside traditional markets. In such a scenario, Bitcoin could vie for a role as one of the assets of the new era, though this will not happen immediately and is far from guaranteed. Investors should prepare for a period of heightened volatility and a reassessment of familiar strategies.