The end of the bond era and the disappearance of liquidity: the main risk for Bitcoin
The financial system is undergoing a fundamental shift that could radically change the rules of the game for all risk assets, including bitcoin. Two independent market analysts point to the same alarming trend: excess liquidity in the system is drying up, and the multi-year bond bull market has come to an end. This creates a unique set of risks and opportunities for the cryptocurrency market.
Liquidity turns negative for the first time since 2021
A key indicator — the measure of excess liquidity 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 the rise of stock markets and risk assets. This driver is now gone.
When liquidity turns negative, capital typically flows from stocks into long-term bonds. The yield curve flattens, which historically has preceded a weakening of stock returns over the next 3–6 months. Notably, in my assessment, the current situation is not the result of actions by the new Fed chair, but rather a catch-up effect in the market, which has been pricing in tightening conditions all year.
Simultaneously, we are witnessing extreme overvaluation of stocks relative to bonds. The current level of this ratio is among the highest in the last 50 years, higher only in 5% of cases. Paradoxically, against this backdrop, retail investors continue to actively buy stocks: inflows into US stock exchange-traded funds recorded the second-largest weekly result in history. The money that typically supported prices is disappearing, and retail is entering exactly when this support has vanished.
The 40-year bond bull market is over
The second, even more significant signal, is the end of the 40-year bond bull market. In 1981, bond yields reached 14%, and by 2020 they had fallen to nearly zero. This 39-year trend of declining rates ended during the pandemic panic, when the system "flooded" itself with liquidity. Now the trend has reversed.
This 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 come to the forefront. JPMorgan data shows that at current valuations, the ten-year return of the S&P 500 index could be around zero. This makes the market a rich field for the active investor.
My analysis: For bitcoin (BTC), both signals primarily carry short-term risk. As a liquidity-sensitive risk asset, it risks coming under pressure alongside overvalued stocks. However, in the long term, if the old model of "buy the index and hold" stops working, and bonds lose their safe-haven status, some capital may 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.