Bitcoin Correlates with Net Liquidity Indicator for the Past Year

Bitcoin has been a hot topic in the financial world since its inception in 2009, with many narratives attached to it. One of the emerging narratives since the onset of the COVID-19 pandemic is that Bitcoin can be used as a global liquidity indicator, especially in terms of the expansion or contraction of balance sheets.

According to a recent report by a leading financial research firm, the net liquidity indicator that they covered in their previous insights has grown year-to-date (YTD). The report also highlights that Bitcoin has been highly correlated with this indicator for the past year.

TradingView source reveals the connection between balance sheet, liquidity, and BTC

The net liquidity indicator is calculated as the difference between the Federal Reserve balance sheet and the sum of the Treasury General Account (TGA) and Reverse Repurchase Agreements (Rev Repo). Essentially, it is a measure of the amount of cash that is available in the economy.

The report further states that the balance sheet of the four largest central banks in the world (Japan, Europe, China, and the US) has increased from $25.6 trillion to $26 trillion this year. This growth in balance sheets is despite the efforts of the European Central Bank (ECB) and the Federal Reserve to tighten monetary policy.

However, the report warns that dwindling order book depth in the crypto markets raises liquidity concerns. This could potentially lead to sharp price movements in either direction. If there is not enough liquidity in the market, it could result in violent price swings, which would be detrimental to investors.

It is worth noting that Bitcoin has gained a reputation as a hedge against inflation, and many investors have turned to it as a store of value during times of economic uncertainty. However, the recent correlation between Bitcoin and the net liquidity indicator suggests that it could also be used as a measure of liquidity in the global economy.

In conclusion, the recent report sheds light on the growing narrative that Bitcoin can be used as a global liquidity indicator. While the balance sheet growth of China and Japan offsets the efforts of the ECB and the Federal Reserve to tighten monetary policy, the dwindling order book depth in the crypto markets raises concerns about liquidity. As always, investors need to exercise caution and carefully consider their investment decisions, particularly in the volatile world of cryptocurrencies.

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