The Hidden Connection Between Central Bank Liquidity and Bitcoin Trends

After a week of tariff frictions, the market welcomed a brief respite over the weekend. However, whether this calm can last remains uncertain. The tariff issue, as a sudden event, has triggered capital flight and emotional Fluctuation, leading to severe market turbulence.

Once the market clarifies the fundamental changes brought by tariffs and releases risk aversion sentiment, the financial market will seek to find a new balance. This also explains why global stock markets, especially the US stock market, ended last Friday with gains. This is evident from the changes in the S&P 500 Fluctuation Index.

Last week, the VIX index reached a recent high, comparable only to the extreme event of the Bank of Japan raising interest rates last year and the financial turmoil triggered by the pandemic in 2020. This is also the reason for the significant fluctuations in the market over the past week, as such situations are indeed rare.

As the huge Fluctuation temporarily subsides, the focus of the cryptocurrency market's trends shifts back to "inflation" and "interest rate cuts." Only interest rate cuts can bring a massive influx of funds, providing growth momentum for risk assets led by Bitcoin.

By comparing the global broad money supply (M2) over the past 10 years with the trends of Bitcoin, this correlation can be analyzed. The significant increase in Bitcoin over the past 10 years is built on the explosive growth of global M2, and this correlation far exceeds that of other financial data.

This also explains why Bitcoin always experiences fluctuations whenever data related to inflation or interest rate cuts is announced, as it ultimately affects whether new funds enter the cryptocurrency space.

However, the cryptocurrency market currently seems overly focused on the Federal Reserve's interest rate cut path, while neglecting another noteworthy data point—the central bank's asset size. It reflects the current liquidity situation of domestic currency.

While most people focus on the West Coast financial markets, they are precisely neglecting our own financial liquidity, which is actually closely related to the fluctuations of Bitcoin.

From the chart showing the changes in the rise of Bitcoin over the past 3 cycles and the growth of central bank asset scales, it can be seen that this correlation fluctuation has almost run through every major rise of Bitcoin and corresponds exactly to the cycle that occurs once every 4 years.

The liquidity of the central bank played a role in the cryptocurrency bull market of 2020-2021, the bear market of 2022, the recovery from the cyclical low in early 2023, the surge in the fourth quarter of 2023 (before the approval of the Bitcoin ETF), and the correction from the second to the third quarter of 2024.

Similarly, in the months leading up to the 2024 U.S. presidential election, the central bank's liquidity turned positive again, just in time for a wave of "election bull".

However, the scale of the central bank began to decline after September 2024 and bottomed out at the end of 2024, currently rising to a high point for the past year. From the perspective of data correlation, changes in central bank liquidity usually precede significant fluctuations in the Bitcoin and cryptocurrency markets.

Interestingly, during the Bitcoin bull market in 2017, the Federal Reserve was not the "money printer" but instead raised interest rates three times throughout the year and engaged in quantitative tightening. However, risk assets led by Bitcoin still performed very optimistically in 2017, as central bank balance sheets hit new highs that year.

Even from the perspective of the S&P 500's gains, there is a certain correlation with the central bank's liquidity. Historical data shows that the annual correlation coefficient between the central bank's total assets and the S&P 500 is about 0.32 (based on data from 2015 to 2024).

Of course, in a sense, it is also because the timing of the central bank's quarterly monetary policy report overlaps with the Federal Reserve's interest rate meeting, which amplifies the correlation in the short term.

In summary, in addition to closely monitoring the U.S. monetary policy, it is also necessary to pay attention to changes in domestic financial data. A week ago, there was news stating: "Monetary policy tools such as reserve requirement ratio cuts and interest rate cuts have ample room for adjustment and can be implemented at any time." What we need to do is track this change.

It is worth noting that, in terms of asset scale, as of January 2025, the total deposits in our country amount to 42.3 trillion USD, while the total deposits in the United States are approximately 17.93 trillion USD. From the perspective of deposit scale, our country has more financial possibilities, and if liquidity improves, there may be some changes.

Of course, another point that needs to be discussed is whether the increased liquidity of funds can flow into the crypto market, as there are still certain restrictions. However, Hong Kong has already provided an answer; in terms of policy looseness and convenience, it is no longer the same as a few years ago.

In the end, it is better to take advantage of the momentum than to struggle against the current. What we need to do, besides waiting, is to dare to ascend step by step when the wind rises and soar against the wind.