The New Focus After Turmoil in Financial Markets: Analysis of BTC's Future Trends

After a week of tariff turmoil, the financial markets had a slight breather over the weekend. However, it remains uncertain how long this calm will last. The tariff issue, as a sudden event, has triggered capital flight to safety and emotional fluctuations, leading to violent market turbulence.

Once the market adapts to the fundamental changes and emotional releases brought about by tariffs, a new balance will be found. This explains why global stock markets, especially the US stock market, closed higher last Friday, ending a week of volatility. The changes in the volatility index of the S&P 500 reflect this.

Last week, the VIX index reached a recent high, comparable to the financial turmoil caused by the pandemic in 2020. This also explains why there has been such significant volatility in the market, after all, such a situation is quite rare.

As the massive fluctuations come to a temporary pause, the focus affecting the cryptocurrency market trends has returned to inflation and interest rate cuts. Only interest rate cuts can bring a significant influx of funds, creating growth opportunities for risk assets led by BTC.

Analyzing the trends of global broad money supply (M2) and Bitcoin over the past 10 years, we can see the correlation between them. The significant increase in Bitcoin over the past decade is indeed built on the foundation of 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 released, as this ultimately affects whether new funds can enter the cryptocurrency space.

However, the market currently seems to be overly focused on the Federal Reserve's interest rate cut path, while neglecting another data point worth noting - the central bank's asset size. It reflects the current liquidity situation of domestic currency and is closely related to the fluctuations of Bitcoin.

The chart showing the changes in the increase of Bitcoin over the past three cycles and the growth of central bank assets indicates that this correlation fluctuates almost throughout every major rise of Bitcoin, which coincides perfectly with the cycle that occurs every four years.

The central bank's liquidity played a role during the cryptocurrency bull market of 2020-2021, the bear market of 2022, the recovery from the cycle low in early 2022 to 2023, the surge in the fourth quarter of 2023, and the pullback from the second to the third quarter of 2024.

Interestingly, during the Bitcoin bull market in 2017, the Federal Reserve was not the party that "loosened monetary policy"; instead, it raised interest rates 3 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 reached new highs that year.

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

Therefore, in addition to closely monitoring the monetary policy of the United States, it is also necessary to pay attention to changes in domestic financial data. Recently, there have been reports stating: "There is sufficient room for adjustment in monetary policy tools such as reserve requirement ratio cuts and interest rate cuts, which can be implemented at any time," and we need to continuously monitor this change.

It is worth noting that by January 2025, the total deposits in our country will be $42.3 trillion, while the total deposits in the United States are approximately $17.93 trillion. In terms of deposit scale, there are more financial possibilities in our country. If liquidity improves, new changes may emerge.

Of course, another issue that needs to be discussed is whether, even with increased liquidity of funds, they can flow into the cryptocurrency market, as there are still certain limitations. However, Hong Kong has already given positive signals; in terms of the tightness and convenience of policies, it is already different from a few years ago.

In conclusion, when the market environment improves, various assets may experience growth. What we need to do, besides waiting, is to be brave in seizing opportunities when they arise and embracing new challenges.