The financial system has exhausted liquidity, the era of bonds is over — what does this mean for Bitcoin
Two independent analytical signals point to a fundamental shift in the global financial architecture. On one hand, the excess liquidity indicator in the system has turned negative for the first time since 2021. On the other hand, a likely end to the 40-year bond bull market has been recorded. Both of these trends carry both short-term risks and long-term opportunities for Bitcoin (BTC).
The excess cash metric, calculated as the difference between the growth rate of the money supply, inflation, and economic growth, has turned negative for the first time since 2021. This "residual" has traditionally fueled stock markets, flowing into equities. Now, this driver is gone. When the indicator goes negative, capital typically begins to flow from stocks into long-term bonds, which historically preceded a weakening of equity returns over the next 3–6 months.
It is important to understand that the current shift is not the result of actions by the new Fed chair. The market has been pricing in tighter conditions throughout the year, with the regulator merely "catching up." Against this backdrop, equity valuations look extremely expensive compared to bonds—the current level of overvaluation has been observed only 5% of the time over the last half-century. Paradoxically, retail investors continue to actively buy stocks, posting the second-largest weekly inflow into U.S. equity ETFs in history. Thus, support disappears precisely as retail enters the market.
The 40-year bond trend has reversed
A second analyst suggests looking at the issue more broadly. While all attention is on AI and cryptocurrencies, the key event is unfolding in the bond market, which underpins nearly every "safe" portfolio. Bond yields peaked at 14% in 1981 and fell to 0% by 2020. This 39-year downtrend ended during the COVID-19 pandemic, when the system "flooded" itself with liquidity, and the bond bull market quietly ended just as everyone felt rescued.
This reversal is not the end of the game, but the beginning of a much more interesting period. Forty years of falling rates lifted all assets together, and passive ownership of the "whole market" beat active selection. Now that the trend has reversed, valuation, balance sheet quality, and real cash flow come to the forefront again. At current valuations, the S&P 500 index's return over a ten-year horizon could be near zero, making the market a rich field for the active investor.
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. However, in the logic of the second analyst, there is a flip side: if the "buy the index and hold" model stops working and safe bonds lose their status as a safe haven, some capital may eventually seek alternatives outside traditional markets. In such a scenario, Bitcoin could contend for a role as one of the assets of a new era, though this will not happen immediately and is far from guaranteed.
My analysis: The market is entering a phase where passive strategies will lose to active management. For Bitcoin, this means increased volatility in the coming months, but a potential strengthening of its role as a hedge against systemic risks of the traditional financial system in the long term.