The liquidity crisis and the twilight of the bond era: what does this mean for Bitcoin
The financial system is undergoing a tectonic shift. Two independent analysts, whose findings complement each other, point to the exhaustion of a key growth driver — free liquidity. One says that "easy money" in the system has turned negative for the first time since 2021. The other speaks of the end of the 40-year bond bull market. For Bitcoin, as for all risk assets, this means a fundamental change in the rules of the game.
Liquidity is drying up: a warning from Bull Theory
According to my data analysis, the excess liquidity indicator 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. It is this "residual" that has traditionally fueled the growth of stocks and other risk assets. It is now gone.
When the indicator turns negative, capital typically begins to flow from stocks into long-term bonds. The yield curve flattens, and historically, this has preceded a weakening of stock returns over a 3-6 month horizon. Notably, the current shift is not a direct consequence of the new Fed chair's actions. The market has been pricing in tightening all year, and the regulator is merely catching up.
The alarm is heightened by extreme overvaluation. Stocks are currently expensive relative to bonds in a way that has only occurred in 5% of cases over the past half-century. Against this backdrop, retail investors continue to actively buy stocks, posting the second-largest weekly inflow in history. The paradox is that the money that typically supported prices is disappearing, and retail is entering precisely when this support has vanished.
Borge: The 40-year bond bull market is over
A different, but equally important, perspective is offered by an analysis of the bond market. While the crowd debates AI and cryptocurrencies, the main event is happening here. To remind you: in 1981, bond yields reached 14%, and by 2020 they had fallen to 0%. That's 39 years of falling rates, ending at the moment of pandemic panic when the system "flooded" itself with liquidity. It was then that the 40-year bond bull market quietly ended.
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 whole 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. According to JPMorgan data, at current valuations, the S&P 500 index could yield around zero per year over a ten-year horizon. This makes the market a rich field for the active investor.
My view: Double risk and a new opportunity for BTC
For Bitcoin, both signals primarily carry short-term risk. If liquidity is drying up and conditions are tightening, BTC, as a liquidity-sensitive risk asset, risks coming under pressure alongside overvalued stocks. In the coming months, we may see a correction.
However, in Borge's logic, there is also 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. But this will not happen immediately and is far from guaranteed. For now, the main thing is not to catch a falling knife, but to closely monitor liquidity.