Hello readers,

There are many tools and frameworks we can leverage to understand Bitcoin’s price action. Things like MV = PQ. Stock to Flow. Network Value to Transactions. Network Value to Metcalf’s Law. Realized Price & MVRV Ratio. Production Cost. And many more.

However, in bull markets, it all comes down to liquidity conditions.

In this week’s report, we take a look at BTC’s relationship with global liquidity.

Is it true that BTC “lags” global liquidity?

Disclaimer: Views expressed are the author’s personal views and should not be relied upon as investment advice.

The DeFi Report is powered by Bit Digital, the leading global platform for high-performance computing infrastructure and one of the largest ETH Treasury Firms. NASDAQ: BTBT

Let’s go.

BTC & Global Liquidity

Data: Global Liquidity Indexes

Per GLI: “historical data shows that changes in liquidity frequently lead changes in risk asset prices, with a roughly three-month lag. Specifically, increases in global liquidity tend to be followed by positive performance in risk assets, while decreases in liquidity tend to precede weaker price action.”

Furthermore, according to Raoul Pal of Global Macro Investor, global liquidity explains 90% of BTC’s price action.

What do we see today?

Data: Global Liquidity Indexes

Three-month annualized growth is currently 10.2%
Annual growth is currently 6%

Of course, that means BTC should keep going up, right?

The data/narrative would lead one to this conclusion. However, Global Liquidity continued to expand well past the BTC top in the last two cycles…

Data: Global Liquidity Index

This contradicts the narrative we’ve all been sold. That BTC lags liquidity.

Let’s pause on that for a minute.

And simply ask the question: why would BTC lag liquidity conditions?

After all, markets are forward-looking. And given that BTC prices information 24/7, 365 across global markets, why would it lag the key variable that market participants understand to be correlated to price?

Instead, we believe BTC is leading global liquidity — especially at market cycle tops.

Why?

We think the market is front-running a tightening of liquidity conditions. It’s sniffing out what’s next.

But at the trough of the market (bear market), global liquidity tends to lead.

Why?

The market tends to wait for the “all clear” from the monetary and fiscal authorities in bear markets.

Please note that we have yet to quantitatively prove this (we don’t have the raw data at this time). But we can make our case simply by studying the chart.

Now. If we assume that Global Liquidity will once again expand past BTC’s top, it’s our job to identify the catalyst for a drop in global liquidity conditions.

In the last cycle, it was inflation and the fact that the Fed had to rapidly hike rates. That’s what the market was “front running” in November of ‘21. The liquidity contraction in this case was driven by the central bank (monetary policy).

What could it be today?

In this cycle, the tightening pressure may not come from the Fed (cuts are expected in Oct. + Dec.), but from fiscal policy.

Anticipated Fiscal Impact: Tariffs + BBB Spending Cuts

Anticipated Tariff Revenue: $380b/year (assumes 13% tariff rate). Below we can see the impact thus far.

Data: FRED

This is removing liquidity from the private sector (the economy) and pulling it back into the public sector’s coffers.

We think this is disinflationary, if not deflationary.

Spending Cuts. The CBO anticipates $1.2 - $1.3 trillion in spending cuts over the next decade (medicaid reform, cuts to SNAP assistance, etc).

That’s $125 billion/year in spending potentially being cut.

When you add it to the Tariff revenues, we have a combined fiscal tightening of $505 billion/year.

That’s 1.7% of GDP.

Now. We also have effective tax cuts for corporations coming in ‘26. No tax on tips. And $35b of new spending/year (infrastructure, defense, rural hospitals, NASA).

This could help to offset the fiscal tightening from tariffs and spending cuts.

But will it be enough?

If BTC is in fact leading liquidity at the top again, we think this is what it’s ultimately “front-running.”

A tightening of fiscal policy, which is negative for liquidity.

You’ll often hear Bessent refer to this in interviews. “We want to stimulate the economy via the private sector.”

We think this will happen. But the path to getting there could be messy. Which is why we believe the Trump admin is adamant about aggressively cutting rates (to “bridge” us to the new economy).

Banking Sector Liquidity

In addition to the changes in fiscal policy brewing under the hood, we are observing a tightening of liquidity in the banking sector.

Below, we can see the growing imbalance between liquidity and available collateral among dealer banks in the overnight funding hours. It’s showing a mounting liquidity shortage in money markets as dealers are starved for either cash or collateral.

This is consistent with:

Fiscal contraction
Ongoing QT
TGA rebuild

Data: Global Liquidity Index

As this plays out, bank reserves are approaching the Fed’s “shortage levels.”

Data: @fwred

In summary, it looks like trouble is brewing. The bond market seems to agree.

Closing Thoughts

It’s clear that BTC “led” global liquidity at the prior two cycle tops. In the ‘21 cycle, it was inflation and rate hikes that BTC was sniffing out. At the time, the Biden administration was transitioning the economy to “fiscal dominance” — which is what drove liquidity for BTC this cycle.

Today?

We are now shifting away from “fiscal dominance.”

In our view, this will have a negative impact on risk assets during the transition.

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Is it True that BTC "lags" Global Liquidity?

Or does it "lead?"

Topics Covered