The financial system is drying up: how the disappearance of liquidity and the end of the bond era threaten bitcoin
Markets are undergoing a fundamental shift that many investors have yet to fully appreciate. Two independent analysts point to symptoms of a deep crisis: excess liquidity in the financial system has turned negative for the first time since 2021, and the 40-year bond bull market appears to have ended. These processes pose a direct threat to risky assets, including Bitcoin (BTC).
Liquidity is drying up: money is leaving the system
A key indicator is the measure of excess cash in the system. It is calculated as the difference between the growth rate of the money supply, inflation, and economic growth. This surplus traditionally fuels the stock market. Now, for the first time in three years, it has turned negative. This means the money that typically drives up stocks and cryptocurrencies is no longer available. When the indicator goes negative, capital generally flows from risky assets into long-term bonds, which historically preceded a weakening of equity returns over the next 3–6 months. Notably, according to my data, the market itself has been pricing in this tightening over the past year, with the Fed merely catching up through its policies.
The end of the 40-year bond cycle
Another analyst, Thierry Borges, highlights a larger trend. Bond yields peaked at 14% in 1981 and fell to zero by 2020. This 39-year downtrend ended during the COVID-19 pandemic, when the system flooded itself with liquidity. Now, in his view, we are witnessing a reversal. The era when passively owning the "entire market" guaranteed success is over. Valuation, balance sheet quality, and real cash flow are taking center stage. JPMorgan data shows that at current valuations, the S&P 500 index's return could be near zero over a ten-year horizon. This makes the market incredibly challenging but also opens the door for active management.
What does this mean for Bitcoin?
For Bitcoin, both signals primarily carry short-term risk. As a liquidity-sensitive risky asset, BTC may come under pressure alongside overvalued stocks. However, there is a flip side. If the old "buy and hold the index" model stops working and bonds lose their safe-haven status, 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, but this will not happen immediately and is far from guaranteed.
My professional opinion: We are currently witnessing a classic regime change. The disappearance of "free money" is not the end of the game but the beginning of a much more complex and interesting phase. For Bitcoin, this means its growth will no longer be automatically fueled by a general influx of liquidity. It will now have to prove its value as an independent asset, rather than just a speculative instrument following the S&P 500 index.