Quick Take
- Many narratives have been attached to Bitcoin, such as an inflation hedge, but one emerging since covid is a global liquidity indicator or the expansion/contraction of balance sheets.
- The net liquidity indicator we covered in previous insights has grown YTD; Bitcoin has highly correlated with this indicator for the past year.
net_liquidity = (fed_bal – (tga + rev_repo))
- While the balance sheet of the four largest central banks accumulatively has increased this year, this includes Japan, Europe, China, and U.S., from $25.6 trillion to $26 trillion.
- For all the work the ECB and Fed are attempting to do with quantitative tightening is being offset by the balance sheet growth of China and Japan.
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Dwindling order book depth raises liquidity concerns in crypto markets, which could push prices violently to the up or downside.
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