Bitcoin, the most popular cryptocurrency, hit a low point in November at around $15,500, but it has since doubled in value to $31,000. In the past two weeks alone, its price has gone up by almost 20%, thanks in part to companies like Fidelity showing interest in Bitcoin by applying for a spot-bitcoin ETF.
The Nasdaq index, which represents many technology companies on Wall Street, also hit its lowest point in late 2022 but has since risen by nearly 50%. The broader S&P 500 index has also gained 25% over the same period.
Financial markets have become riskier since late 2022, with investors taking more chances. This has led to increases in the value of assets like Bitcoin and the stock market. However, some experts are warning that we should be cautious because certain indicators suggest that there may be a shortage of cash available in the future.
However, there are concerns about the availability of cash in the market. Measures of cash liquidity, such as the Fed net liquidity indicator and the global net liquidity indicator, have been decreasing recently.
Lewis Harland, a portfolio manager at crypto fund Decentral Park Capital, says that it’s unusual for Bitcoin to perform well when liquidity measures are declining. He believes that this important factor is being overlooked by investors, and it makes him cautious about the future of Bitcoin.
The availability of cash has a big influence on the value of assets like Bitcoin and stocks. In the past, changes in cash availability have often coincided with major peaks or bottoms in the market. The global net liquidity indicator, which looks at the supply of cash in major economies, has fallen to $26.5 trillion, the lowest since November 2022. The Fed net liquidity indicator, which measures the amount of U.S. dollars available, has also decreased from $6.3 trillion to $6 trillion in recent weeks.
According to tweets from Douglas Orr, the CEO of Endeavour Equity Strategy, and Sven Henrich, the founder and main market strategist at NorthmanTrader, bank reserves kept at the Federal Reserve (Fed) are also declining. Banks use these reserves to provide loans and credit. When reserves decrease, it indicates a tightening of credit, which can make investors more cautious. This decline in bank reserves raises concerns about the sustainability of the rally in the S&P 500 and Bitcoin.
There is a similar pattern when looking at the MSCI All Country World Index (ACWI) and the total assets of the five major central banks (the Fed, ECB, BOJ, PBOC, and BOE), which also reflects the availability of cash. The combined balance of these central banks is decreasing, indicating potential pressures on the availability of cash for risky assets.
The correlation between central bank liquidity and market performance suggests that it could be a challenge in the future. This is particularly true as the U.S. Treasury issues more government debt, which takes more cash out of the market.
A pseudonymous macro trader and investor named Markets & Mayhem highlighted this divergence between stocks and central bank balance sheets in a recent newsletter, indicating potential difficulties ahead.