The collapse of the "cheap money" era: how liquidity depletion and a bond market reversal threaten Bitcoin
The financial system is entering a period of fundamental transformation. Two independent analysts are recording a shift that could rewrite the rules of the game for all risk assets, including Bitcoin. This is not about an ordinary correction, but a structural depletion of liquidity and the end of a 40-year bull cycle in the bond market.
The excess liquidity indicator in the U.S. financial system has turned negative for the first time since 2021. This indicator, calculated as the difference between the growth rate of the money supply, inflation, and economic growth, has historically been a key driver for stock markets. Now this "fuel tank" is empty. When the indicator goes negative, capital typically flows from stocks to bonds, and the yield curve flattens. Historically, this has foreshadowed a weakening of stock returns over a 3-6 month horizon.
Notably, in my observations, the current shift is not a direct result of the new Fed leadership's actions. The market has been pricing in tighter conditions all last year, and the regulator is merely catching up to these expectations. Against this backdrop, stocks look extremely expensive relative to bonds—such levels have been observed only 5% of the time over the past half-century. Paradoxically, retail investors continue to actively buy stocks, recording the second-largest weekly inflow into U.S. stock ETFs in history. They are entering the market precisely when the traditional pillar for growth—excess liquidity—has disappeared.
The 40-Year Bond Cycle Is Over
A second analyst suggests looking at the situation more broadly. While all attention is focused on AI and cryptocurrencies, the key event is unfolding in the bond market. The yield on 10-year UST peaked at 14% in 1981 and steadily declined to near-zero levels by 2020. This 39-year downward trend in rates, which lifted all assets indiscriminately, ended during the pandemic panic. It was then, when the system flooded itself with liquidity, that the old bond bull market quietly became history.
Now the trend has reversed. This is not the end of the game, but the beginning of a new, much more complex era. Passive ownership of "the whole market" will no longer bring easy money. Valuation, balance sheet quality, and real cash flow come to the forefront. At current multiples, the return on the S&P 500 index over a ten-year horizon could trend toward zero. This makes the market an ideal environment for an active investor, but extremely dangerous for those accustomed to the passive "buy and hold" strategy.
For Bitcoin, these signals carry a dual but primarily short-term risk. As a risk asset highly sensitive to liquidity, BTC may come under pressure alongside overvalued stocks. However, there is a flip side: if traditional "safe havens" like bonds lose their status, some capital may eventually begin seeking alternatives outside traditional markets. In such a scenario, Bitcoin could vie for a role as one of the assets of the new era, but this will not happen immediately and is far from guaranteed.
My analysis: we are witnessing a classic transition from "a rising tide lifts all boats" to "survival of the fittest." For Bitcoin, this means that in the coming quarters, its price will heavily depend on the macroeconomic backdrop, not just internal network factors. Investors should prepare for increased volatility and a reassessment of risk management.