The financial system has dried up: how the end of the bond era is putting pressure on bitcoin
The market is undergoing a tectonic shift, and two independent analytical signals point to the same thing: the familiar financial paradigm is crumbling. This is not just about a correction — we are witnessing a fundamental exhaustion of liquidity and the end of a 40-year bull cycle in the bond market. For Bitcoin, as for all risk assets, this creates a unique set of threats and opportunities.
Liquidity Has Turned Negative: What This Means for the Market
My analysis shows that the excess liquidity indicator in the U.S. financial system has turned negative for the first time since 2021. This indicator is calculated as the difference between the growth rate of the money supply, inflation, and economic growth. This "residual" typically fuels stock markets, but now it has simply disappeared.
When liquidity turns negative, capital traditionally flows from stocks into long-term bonds. The yield curve flattens, and historically, this foreshadows a decline in stock returns over the next 3–6 months. It is important to emphasize: the new Fed Chair Kevin Warsh is not creating this shift — the market has been pricing in tightening all year, and the regulator is merely "catching up."
The situation is exacerbated by overheated valuations. Stocks are currently expensive relative to bonds in a way that has only occurred in 5% of cases over the past half-century. Nevertheless, retail investors continue to actively buy stocks — inflows into U.S. equity exchange-traded funds recorded the second-largest weekly inflow in history. The money that typically supported prices is drying up, and retail is entering precisely when this support has vanished.
The 40-Year Bull Market in Bonds Is Over
The second, even deeper signal concerns the bond market. In 1981, long-term bond yields reached 14%, and by 2020, they had fallen to 0%. This was 39 years of declining rates, which ended during the COVID-19 panic. At that time, the system "flooded" itself with liquidity, and the 40-year bull market in bonds quietly concluded just when everyone felt saved.
This reversal is not the end of the game, but the beginning of a much more interesting phase. Falling rates lifted all assets together, and passive ownership of "the entire market" beat the skill of selection. Now that the trend has reversed, valuation, balance sheet quality, and real cash flow are once again taking center stage. At current valuations, the annual return of the S&P 500 index could be around zero over a ten-year horizon. This makes the market a rich field for the active investor.
Bitcoin Under Pressure: Short-Term Risk and Long-Term Opportunity
For Bitcoin, both signals primarily carry short-term risk. If liquidity dries up and conditions tighten, Bitcoin, as a liquidity-sensitive risk asset, risks coming under pressure alongside overvalued stocks.
However, within the logic of the second scenario, there is a flip side: if the old model of "buy the index and hold" stops working, and traditionally safe bonds lose their status as a safe haven, some capital may eventually seek alternatives outside traditional markets. In such a scenario, Bitcoin could compete for a role as one of the assets of a new era — though this will not happen immediately and is far from guaranteed.
Expert Opinion: We stand on the brink of a shift in the investment paradigm, where the passive strategy gives way to active management. For Bitcoin, this means increased volatility in the coming months, but in the long term — the potential to become a haven for capital seeking independence from traditional cycles. However, the path to this will be thorny and will require exceptional discipline from investors.