Liquidity flood pushes bitcoin to brink of new bull run
As a result of the BTFP, the Fed’s balance sheet grew by $297 billion ($442 billion) last week as commercial banks pledged securities in exchange for matching funding that translated into the flood of liquidity.
In turn, Bitcoin rose 40 percent from around $20,200 on March 10, the day of SVB’s collapse, to a peak of $28,000 on Monday.
The latest increase comes as traders react to a new Fed pledge to supply more US dollar liquidity to the global financial system via more regular funding swap lines with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank .
Bitcoin’s price drivers
Bitcoin’s price action over the past week has also decisively broken its reputation as a barometer of risk appetite correlated to high-growth stocks.
On Friday, the tech-heavy Nasdaq index fell, while bitcoin rose above $27,000. This shows that bitcoin’s intrinsic value is like a barometer of liquidity, not risk appetite.
It follows that risk appetite, banking crises, and inverted yield curves are all symptoms of liquidity cycle stages, and if you want to know when to buy and sell the number one cryptocurrency, you should follow the liquidity cycle above all else.
It is easier said than done. However, British macroeconomist and bond market veteran Michael Howell boasts that he has built computer models to measure the liquidity of the financial system as a guide to future asset returns.
Howell is the founder of US$1 billion multi-asset asset manager Cross Border Capital, and defines liquidity as the total sum of wholesale cash and credit passing through the world’s financial markets, as opposed to the retail money supply.
Cross Border Capital’s data produces a global liquidity index by measuring data across 90 national economies, and Howell says the most recent liquidity cycle has bottomed out with room for another peak around 2025 or 2026. The macroeconomist also says historical data shows liquidity cycles work at regular five to six year intervals as central bankers fulfill their mandates.
Cross Border Capital’s Global Liquidity Index uses data from 90 countries to plot and predict liquidity cycles in financial markets. Cross Border Capital
Bitcoin is the best barometer of liquidity today according to Howell, and if you accept his research at face value, more liquidity is bullish for bitcoin in the next few years.
Bitcoin maximalists and libertarians also insist that the disciples of their financial revolution must be their own bankers.
However, tens of millions of retail traders are believed to rely on centralized exchanges such as Coinbase or local Australian operators to hold deposits on their behalf.
So, will the moral hazard of guaranteeing banks’ deposits extend to deposits on licensed crypto exchanges if they also collapse on bad investment plays? There are already plans for capital adequacy and custody requirements for exchanges in Australia, with the creeping nationalization of financial markets perhaps spilling over into the crazy crypto ecosystem before we know it.
