Dwindling liquidity and the end of the bond era: a double blow to Bitcoin
Financial markets are entering a phase of tectonic shifts. Two independent analytical signals indicate the exhaustion of traditional growth drivers, creating a unique risk scenario for Bitcoin. This is not about a temporary correction, but a fundamental shift that rewrites the rules of the game for all asset classes.
The first and most alarming signal is the state of global liquidity. My analysis shows that the indicator of excess liquidity in the 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 and the sum of inflation and economic growth. It is this "residual" that traditionally fueled stock markets. Now this source has dried up.
When excess liquidity turns negative, capital begins to flow from risky assets, such as stocks, into long-term bonds. The yield curve flattens, and historically this has foreshadowed a weakening of the stock market over a 3–6 month horizon. Notably, the new Fed Chair Kevin Warsh is not the root cause of this shift — the market has been pricing in tightening all year, and the regulator is merely "catching up."
Compounding the situation is the overheating of valuations. Stocks are currently expensive relative to bonds in a way that has only occurred in 5% of cases over the past half-century. Paradoxically, against this backdrop, retail investors continue to actively buy stocks: US stock exchange-traded funds saw the second-largest weekly inflow in history. This is a classic pattern — retail enters precisely when fundamental support disappears.
The 40-year bond bull market is over
The second perspective offers an even deeper analysis. While the crowd debates AI and cryptocurrencies, the key event is unfolding in the bond market, which lies at the core of almost every "safe" portfolio.
Historical data is relentless: in 1981, bond yields reached 14%, and by 2020 they had fallen to nearly 0%. This was 39 years of declining rates, ending at the moment of the COVID-19 pandemic panic. At that time, the system "flooded" itself with liquidity, and the 40-year bond bull market quietly concluded precisely when everyone felt saved.
This reversal is not the end of the game, but the beginning of a much more interesting phase. Forty years of falling rates lifted all assets together, and passive ownership of "the whole market" beat the skill of selection. Now that the trend has reversed, valuation, balance sheet quality, and real cash flow come to the forefront again. JPMorgan data confirms: at current valuations, the annual return of the S&P 500 index could be near zero over a ten-year horizon. This makes the market a rich field for the active investor.
My professional conclusion: for Bitcoin, both signals primarily carry short-term risk. If liquidity dries up and conditions tighten, Bitcoin, as a liquidity-sensitive risky 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. The current situation demands maximum caution from investors and a revision of strategies based on extrapolating the past.