Cryptocurrencies have faced significant challenges since mid-December, with early quarter expectations diminishing as many assets dropped below last year’s lows. Investors who had patiently awaited recovery since the end of 2021 have yet to see any compensation for their losses. The current landscape remains challenging, with even numerous altcoins failing to provide relief for those holding out hope.
Global Liquidity and Cryptocurrency
An increase in liquidity typically fuels risk markets, which in turn can lead to bullish trends in cryptocurrencies. The rationale is straightforward: as global liquidity rises, so too does the potential for cryptocurrency appreciation.
Global liquidity is generally understood as the volume of financial flows in the market. While various metrics and indicators are employed to gauge it, these remain estimates. Understanding the driving forces behind liquidity changes is crucial. Nicrypto comments on the subject:
“If interest rates rise: Borrowing becomes more expensive, cooling overall spending and often leading to tighter market liquidity. Conversely, if rates fall: Borrowing costs decrease, potentially providing more breathing room for the economy and risk assets, including cryptocurrencies.”
When the DXY strengthens, liquidity may be drained from other markets, increasing pressure on cryptocurrencies. Conversely, a declining DXY can lead to liquidity flowing to other currencies, offering support to cryptocurrencies as well.
Will Cryptocurrencies Rise?
The answer is not overly complicated. As M2 money supply increases, cryptocurrencies should rise accordingly. Historical data from 2013 to 2024 shows a remarkable 94% correlation between Bitcoin
$82,062 and global M2.
While global liquidity is rapidly increasing, Quantitative Tightening (QT) has not yet reversed under the Fed. As discussions of interest rate reductions emerge, one must consider when the Fed will reverse its balance sheet contraction. Only then, alongside increased M2, can we expect a genuine upward movement in cryptocurrencies. We are currently moving in this direction.