Chart of the Week | Liquidity is Breaking Out

Good morning everyone and welcome to our Chart of the Week series! Every week we provide you with the most informative Bitcoin charts, sent directly to your inbox.

This week we dive into global liquidity to better understand how liquidity trends may be signaling the next directional move for financial markets.

Let’s dive in!

Today, there are few indicators more important to financial markets than global liquidity. Bitcoin, with its absolute scarcity, is one of the most sensitive assets to global liquidity and it’s therefore, important to monitor.

Trying to accurately measure this liquidity is difficult, and folks like Michael Howell are much more qualified on the subject, however there are certain relatively simple measures of liquidity which seem to be showing a potential trend breakout.

Brief Definitions

As previously mentioned there is no singular metric or universally accepted index for measuring global liquidity. We can, however, look to three main components of liquidity, namely:

• The Federal Reserve balance sheet;

• The Reverse Repo and;

• The Treasury General Account (TGA).

To briefly define these terms, the Fed’s balance sheet shows of the value of the assets that the Federal Reserve holds (mainly via “money printing”). The Reverse Repo is a facility of the Federal Reserve wherein excess dollars are loaned, by the major banks to the Fed, on an overnight basis. The Reverse Repo can be simplistically be viewed as “sterilized liquidity”- when the government creates too much liquidity, it can be removed from the system via the Reverse Repo facility. Finally, the Treasury General Account is simply the government’s ‘checking account’.

Liquidity and Bitcoin

One of bitcoin’s core attributes is its absolute scarcit; there will only ever be 21 million bitcoin. After the latest block reward halving, bitcoin now holds the property of having a lower inflation rate than even gold.

This means that as the number of dollars in the global system increases, given the scarcity of bitcoin, the fiat price of bitcoin should increase in order to correct the supply/demand imbalance.

No model is perfect, especially when it comes to bitcoin, but broad-based trends start to appear when analyzing the bitcoin price alongside global liquidity. Generally speaking, as the previously mentioned measure of US liquidity decreases, bitcoin faces difficulty.

Conversely, as US liquidity starts to increase, the dollar-denominated value of bitcoin tends to rally (green boxes below).

Interestingly, the bitcoin rally that started in 2024 has been occurring while liquidity has decreased from its 2021 peak. In fact, the Federal Reserve’s Quantitative Tightening (“QT”) regime has dominated the past two years, where the Fed has actively attempted to remove liquidity from the system in a bid to address inflation.

Where to Next?

It appears that the recent trend in liquidity might be starting to reverse; the Federal Reserve has started a rate cutting cycle and the pace of Quantitative Tightening is slowing. Whether the Federal Reserve restarts their Quantitative Easing (“QE”) cycle or not is still unclear given the current fiscal landscape.

One thing is certain, however - bitcoin’s price has shown remarkable strength over the past year, in spite of an active effort by the Fed to decrease liquidity. This would appear to indicate that bitcoin has much more room to run to the upside, should liquidity confirm the trend break higher.

That’s it from us this week - remember, stay humble and stack sats!