With central banks around the world cutting interest rates and pumping stimulus, how can you position your investment portfolio to benefit from the resulting increase in liquidity? Read on.
Macroeconomic stimuli are deepening
Global liquidity is increasing sharply as central banks around the world, especially in China and the United States, adopt policies aimed at pumping money into their economies.
China recently announced a $143 billion stimulus package, which is driving strong economic momentum. Moreover, the People’s Bank of China has Assignment Commercial banks will cut mortgage rates on existing home loans by at least 30 basis points below the loan’s prime interest rate by October 31, all to support the faltering property market.
As a result, Chinese stocks went parabolic. In the past five days alone, the Shanghai Composite Index has risen by 20%, with an 8% jump recorded in just one day on September 30.
But the matter is not limited to China only. On September 18, the US Federal Reserve implemented an aggressive interest rate cut of 50 basis points According to According to the CME FedWatch tool, the market is now anticipating another cut of 25 to 50 basis points in November. If that happens, the federal funds rate could fall to a range of 4.25-4.50% or 4.50-4.75%.
Furthermore, since the FOMC meeting on September 18, crypto assets have outperformed many traditional assets. Increased liquidity, in both the US and China, is likely to boost investor appetite for riskier investments such as cryptocurrencies in the near future.
Let’s dive deeper into each of these events and explore how they could shape the future of the cryptocurrency market, especially Bitcoin, in the coming days.
Global liquidity is on the rise
When it comes to understanding Bitcoin price movements, global liquidity stands out as one of the strongest indicators.
Global liquidity or M2 supply refers to readily available funds, such as cash and bank deposits. When central banks ease their policies – by lowering interest rates or pumping stimulus into the economy – they increase the amount of money flowing through the system.
Over the years, Bitcoin has shown a strong correlation with liquidity, meaning that when the global money supply grows, the price of Bitcoin tends to rise. Conversely, when liquidity shrinks, Bitcoin’s performance often falters.
According to A He studies By Lyn Alden Investment Strategy Bitcoin’s correlation to global liquidity from May 2013 to July 2024 was an impressive 0.94. A correlation of 1.0 indicates perfect alignment, so 0.94 is too high.
However, zooming in on shorter time frames shows a more complex picture. Over a rolling 12-month period, the correlation between Bitcoin and liquidity dropped to 0.51, and over a 6-month period, it dropped further to 0.36.
Why is this the case? While liquidity is the main driver of Bitcoin’s long-term price movements, short-term volatility is often affected by Bitcoin-specific events – such as regulatory updates, market sentiment, or important cryptocurrency news. This explains why Bitcoin sometimes deviates from the broader short-term liquidity trend.
Nowadays, the global liquidity picture is changing. After a period of contraction, the M2 money supply began to grow again – and quickly. After being squeezed for most of 2022 and early 2023 due to hawkish Fed policies, US M2 supply saw one of the biggest spikes in recent months, reaching more than $21 trillion by early September.
Globally, M2 supply reached nearly $108 trillion by late September, indicating a clear upward trend after months of dormancy.
This increase in liquidity is crucial because, as history has shown, the price of Bitcoin often rises along with increased liquidity. A similar pattern emerged during the COVID-19 pandemic in 2020, when central banks, especially the Federal Reserve, pumped massive amounts of money into the economy. M2 supply rose, and Bitcoin price followed suit.
But in 2022, when the Fed started raising interest rates and withdrawing liquidity, M2 growth turned to the downside, and the price of Bitcoin fell sharply.
The basic idea is that Bitcoin is very sensitive to liquidity conditions. As the global supply of M2 rises, Bitcoin often benefits. With the current rise in liquidity, especially in the US and China, another increase in Bitcoin prices may be on the horizon.
However, as history shows, short-term fluctuations may deviate from this long-term trend. It is necessary to monitor Bitcoin’s liquidity conditions and factors to gauge where the price may head next.
Regression effect
As global liquidity rises due to the actions of central banks around the world, this capital flow gradually spreads through the economy, eventually making its way into cryptocurrency markets.
The process begins with increased cash flow in traditional sectors, as businesses and consumers have more capital at their disposal. This boost leads to increased spending and investment across a variety of asset classes.
Initially, this liquidity flows into safer assets such as bonds, gold or real estate. These assets are usually the first to benefit as investors seek to place their capital in more stable and established markets.
However, as liquidity accumulates and confidence in the economy strengthens, the next phase begins: investors begin to look for higher returns and shift their focus to riskier assets.
For example, over the past two decades, China has seen five major stock rallies, three of which were driven by massive stimulus packages. Now, as the country launches another round of economic stimulus, some analysts believe we may be at the beginning of a fourth bull run.
As investors became more comfortable with risk, they began to look beyond the stock markets for greater returns. This is where encryption enters the picture.
Assets like Bitcoin are viewed as high-risk, high-reward investments. As more money flows through the financial system, supported by central bank policies, some of this liquidity inevitably leaks into the cryptocurrency space.
This process unfolds gradually, following economic growth, investor sentiment, and the ongoing search for yield in a liquidity-rich environment.
Ultimately, this ripple effect – moving from the economy to bonds to stocks and ultimately to cryptocurrencies – shows how central bank policies can drive demand in the crypto space, making them a very attractive destination for investors during periods of monetary expansion.
What do the experts think?
Many experts believe that the combined forces of liquidity injections, economic stimulus, and interest rate cuts are paving the way for risky assets like Bitcoin to take center stage.
Quentin François, co-founder of WeRate, offers a historically optimistic view, noting that “80% of October was green,” referring to stock and cryptocurrency markets, which tend to perform well in the fourth quarter.
Even more interesting is that he points out that every election year has seen a green October, November and December. What makes this even more compelling is that whenever September ends on a positive note, the fourth quarter tends to follow suit.
But not everyone is viewing the flood of liquidity through rose-colored glasses. Daniel Lacalle, an economist and university professor, took a more cautious approach.
He warns that although liquidity is indeed “exploding,” this is not necessarily all good news. Lacalle warns that this massive influx of money could lead to “unprecedented monetary devastation.”
According to Lacalle, increased liquidity could ultimately lead to increased inflation, economic recessions and asset bubbles, risks that could harm even strong-performing markets like cryptocurrencies in the long term.
Meanwhile, Max Soltakov, CEO of Yuna Network, shared exclusive insights with crypto.news, emphasizing the role of liquidity in driving the price of Bitcoin.
“Historically, bitcoin has risen during periods of global liquidity expansion,” Soltakov said. He believes that “institutional investors are likely to shift more capital into Bitcoin and cryptocurrencies as a hedge against monetary instability.”
Another key factor to watch, according to Soltakov, is the role of decentralized assets in areas with strict capital controls, especially in China.
“In China, cryptocurrencies are not just an investment – they are a lifeline for moving wealth beyond the government’s reach.”
As liquidity expands in these markets, people will likely turn to decentralized assets like Bitcoin to keep wealth outside government control.
From a macro perspective, Federal Reserve Chairman Jerome Powell recently indicated that further rate cuts are likely on the way, although they will likely be smaller than the recent 50 basis point cut.
While US interest rates are still hovering around 4.8% in the long term goal “This means two additional cuts, but not more than 50%,” Powell explained, noting that the Fed is moving cautiously to avoid overheating the economy.
For cryptocurrencies, this means that as liquidity continues to grow, capital flow into risky assets can increase. However, the balance between inflation and economic stability remains a crucial factor to monitor.