The financial system is losing liquidity: what this means for bitcoin
The market is experiencing a tectonic shift that could fundamentally change the rules of the game for all investors. Two independent analysts are recording alarming signals: excess liquidity in the global financial system has turned negative for the first time since 2021, and the 40-year bull cycle in the bond market appears to be definitively over. These processes pose direct risks to Bitcoin and other risk assets.
Analyst Bull Theory points out that the excess liquidity indicator — the difference between the growth rates of money supply, inflation, and economic growth — has turned negative. This "residual" has traditionally fueled the stock market, pushing stock prices higher. Now, this driver is gone. When the indicator goes negative, capital typically flows from stocks into long-term bonds. The yield curve flattens, and historically, this has foreshadowed a weakening of the stock market over the next 3–6 months. Notably, according to the analyst, Fed Chair Kevin Warsh is not the initiator of this shift — the market has been pricing in tightening all year, and the regulator is merely "catching up" with reality.
The situation is exacerbated by overheated valuations. Stocks are currently more expensive relative to bonds than at any point in the last half-century — the current premium level has only been observed in 5% of cases during this period. Against this backdrop, retail investors continue to actively buy stocks, showing record inflows into exchange-traded funds. A paradoxical picture emerges: the money that typically supported prices is disappearing, and retail is entering precisely when the foundation is being pulled out from under them.
The 40-year bond cycle is over
Another perspective is offered by analyst Thierry Borje. He argues that the main focus is on the wrong bubble. While the crowd debates AI and cryptocurrency, the key event is unfolding in the bond market, which lies at the core of nearly every "safe" portfolio. Borje reminds us: in 1981, 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 pandemic. At that time, the system "flooded" itself with liquidity, and the 40-year bull market in bonds quietly ended precisely when everyone felt saved.
According to him, this reversal is not the end of the game, but the beginning of a much more interesting era. Forty years of falling rates lifted all assets together, and passive ownership of "the entire market" beat the ability to select. Now that the trend has reversed, valuation, balance sheet quality, and real cash flow are once again coming to the forefront. Borje cites JPMorgan data: 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.
For Bitcoin, both signals primarily carry short-term risk. If liquidity dries up and conditions tighten, Bitcoin, as a risk asset sensitive to liquidity, risks coming under pressure alongside overvalued stocks.
My analysis: Borje's logic also has 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 the new era, although this will not happen immediately and is far from guaranteed. For now, the market is entering a phase where only those who can adapt will survive.