Liquidity Drying Up and the Collapse of the 40-Year Bond Bull Market: What Awaits Bitcoin?
The financial system is undergoing a fundamental shift that many investors are still underestimating. Two key signals — the disappearance of excess liquidity and the end of the era of falling bond yields — are creating a new reality for all risk assets, including bitcoin.
An analysis of excess liquidity flows shows that its level 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, inflation, and economic growth. This "residual" has traditionally fueled stock markets, but it has now simply vanished. When liquidity turns negative, capital typically flows from stocks into long-term bonds, flattening the yield curve. Historically, such a pattern has preceded a weakening of stock returns over the next 3–6 months. Notably, this shift is not the result of actions by new Fed Chair Kevin Warsh, but rather a delayed reaction to the tightening that the market has been pricing in all of last year.
Alongside this, a historic revaluation is taking place. Stocks are currently expensive relative to bonds in a way that has only occurred in 5% of cases over the past half-century. This is an extreme level. The irony is that retail investors, seemingly oblivious to this, continue to buy stocks through exchange-traded funds at record rates. So, the money that typically supported prices is drying up, and retail is entering the market precisely at the moment when this support is disappearing.
The End of the 40-Year Bond Bull Market
There is also another, longer-term perspective. While all attention is focused on AI and cryptocurrencies, the main event is unfolding in the bond market, which underpins almost every "safe" portfolio. In 1981, bond yields reached 14%, and by 2020 they had fallen to nearly zero. This was 39 years of falling rates, which ended during the pandemic panic when the system was flooded with liquidity. Now, this trend has reversed.
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 active selection. Now that the trend has changed, valuation, balance sheet quality, and real cash flow come to the forefront. Data shows that at current valuations, the return of the S&P 500 index could trend toward zero over a ten-year horizon. This makes the market a rich field for the active investor.
Expert opinion from Cryptalist: For bitcoin, both signals primarily carry short-term risk. As a liquidity-sensitive risk asset, BTC could come under pressure alongside overvalued stocks. However, in the long term, there is a flip side: if the traditional "buy and hold" model stops working and bonds lose their safe-haven status, some capital may begin to seek alternatives outside traditional markets. Bitcoin could compete for a role as one of the assets of a new era, but this will not happen immediately and is far from guaranteed.