Liquidity is drying up, the era of bonds is coming to an end: what this means for Bitcoin
The financial system is undergoing a tectonic shift that could radically alter the landscape for all risk assets, including Bitcoin. Two independent analysts point to the same alarming symptom: the excess liquidity that has fueled market growth for years is disappearing. This is not just a correction — it may be the end of an entire era.
Analyst Bull Theory notes that the excess liquidity indicator in the U.S. financial system has turned negative for the first time since 2021. It is calculated simply: inflation and economic growth are subtracted from the growth rate of the money supply. This residual has traditionally flowed into stocks and other risk assets. Now it is gone. When the indicator goes negative, capital typically begins to shift from stocks to long-term bonds. The yield curve flattens, and historically, this has foreshadowed a weakening of the stock market within the next 3–6 months.
Against this backdrop, the overheating of valuations looks particularly alarming. Stocks are currently expensive relative to bonds in a way that has only occurred in the rarest moments over the past half-century — the indicator is in the top 5% of historical values. At the same time, retail investors continue to actively buy stocks, recording the second-largest weekly inflow into exchange-traded funds in history. This creates a paradoxical picture: the foundation that supported valuations is disappearing, yet retail investors are entering precisely at this moment.
The Forty-Year Bond Bull Market Is Over
Thierry Borger offers a different perspective on the situation. While all attention is focused on AI and cryptocurrencies, the main event is unfolding in the bond market, which underpins nearly every "safe" portfolio. He reminds us that in 1981, bond yields reached 14%, and by 2020, they had fallen to 0%. That was 39 years of declining rates, which ended during the panic of the COVID-19 pandemic. At that time, the system flooded itself with liquidity, and the forty-year bond bull market quietly ended just 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 skill of selection. Now that the trend has reversed, valuation, balance sheet quality, and real cash flow are once again coming to the forefront. Borger 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.
My analysis: For Bitcoin, both signals primarily carry short-term risk. As a liquidity-sensitive risk asset, BTC risks coming under pressure alongside overvalued stocks if capital outflows continue. However, in the long term, Borger's logic also reveals a flip side: if the "buy the index and hold" model 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.