Bitcoin “A Global Liquidity Barometer”
The JellyC Team would like to highlight an article written by Sam Callahan and commissioned by Lyn Alden, "Bitcoin: A Global Liquidity Barometer". The article examines how Bitcoin's price movements closely align with global liquidity conditions. Bitcoin moves in the direction of global liquidity 83% of the time in any given 12-month period, which is higher than any other major asset class, making it a strong barometer of liquidity conditions. Bitcoin’s correlation with global liquidity is high but not immune to short-term deviations caused by idiosyncratic events or internal market dynamics, especially during periods of extreme valuation. Combining global liquidity conditions with Bitcoin on-chain valuation metrics provides a more nuanced understanding of Bitcoin cycles, helping investors identify moments when internal market dynamics may temporarily decouple Bitcoin from liquidity trends.
Directional Alignment with Global Liquidity in 12-month Periods
Understanding how asset prices respond to changes in global liquidity has become crucial for investors aiming to enhance returns and manage risk effectively. In today's markets, asset prices are increasingly shaped by central bank policies directly influencing liquidity conditions, making traditional fundamentals less dominant in driving asset valuations.
This phenomenon has been particularly pronounced since the Global Financial Crisis (GFC) 2008. Unconventional monetary policies have emerged as the dominant force moving asset prices. By manipulating liquidity levers, central banks have essentially turned the market into a singular, liquidity-driven trade. Economist Mohamed El-Erian encapsulated this situation by stating that central banks have become "the only game in town."
Legendary investor Stanley Druckenmiller echoed this sentiment when he remarked:
"Earnings don’t move the overall market; it's the Federal Reserve Board... focus on the central banks and focus on the movement of liquidity... most people in the market are looking for earnings and conventional measures. It's liquidity that moves markets."
Given this backdrop, it has become imperative for investors to understand how to measure global liquidity and analyze how different assets respond to changes in liquidity conditions. This knowledge is essential for navigating markets that are increasingly driven by liquidity dynamics rather than traditional fundamental factors.
JellyC uses liquidity readings to underpin the long-term approach to investing in digital assets. We measure short-term deviations using on-chain metrics such as the fear and greed index and the MVRV Score.
Article written by Sam Callahan and Commissioned by Lyn Alden
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