#Warning Signs for Cryptocurrencies as Central Bank’s Tight Liquidity Situation Continues

04/07/2023 17:31 • AI & Tech Insights • 68 views

According to reports, Bloomberg warned that due to the central bank’s tight liquidity situation, cryptocurrencies may experience long-term adjustments. The sharp decline in M2 money supply and bank deposits means that liquidity continues to be squeezed. Mike McGlone, senior macro strategist at Bloomberg Intelligence, said that risky assets typically rise and fall with the support of liquidity and declining US money supply, while bank deposits indicate that cryptocurrencies are facing a headwind. It may be illogical to expect the stock market, crude oil, copper, and Bloomberg Galaxy Cryptocurrency Index (BGCI) to maintain their recent rebound. The year-on-year measures of money supply and commercial bank deposits have decreased by about 2%, which is the highest value in our database since 1959. Most central banks are still tightening policies, which may indicate a lower plateau for BGCI. Our view is that Bitcoin is facing a headwind, but it will eventually transition to a trading mode more like gold and treasury bond.

Bloomberg analyst: It may be illogical to expect BTC prices to maintain their recent rebound

Introduction

Bloomberg recently released a report warning about the long-term adjustment that cryptocurrencies may face due to the tightening liquidity situation of central banks. This situation has resulted in the sharp decline of M2 money supply and bank deposits, which is squeezing liquidity. As a result, cryptocurrencies are facing headwinds and may not be able to maintain their recent rebound.

The Link between Liquidity and Risky Assets

According to Mike McGlone, senior macro strategist at Bloomberg Intelligence, the performance of risky assets such as cryptocurrencies, crude oil, copper, and the stock market typically rise and fall based on the support of liquidity. When liquidity is tight, these assets may face bearish pressures. The sharp decline in US money supply and bank deposits is a major indication that cryptocurrencies are not immune to this liquidity-driven bearish pressure.

The Current Situation

The year-on-year measures of money supply and commercial bank deposits have decreased by about 2%, which is the highest value recorded in Bloomberg’s database since 1959. While most central banks are still tightening their policies, it is logical to expect a lower plateau for Bloomberg Galaxy Cryptocurrency Index (BGCI). Bitcoin, in particular, is expected to face headwinds as it transitions to a more trading oriented mode, similar to gold and Treasury bond.

Implications for the Cryptocurrency Market

The decline in M2 money supply and bank deposits has already caused cryptocurrency prices to fall. As central banks continue to tighten their policies, the impact on cryptocurrencies will be more pronounced. It is unlikely that cryptocurrencies will maintain their recent rebound if liquidity conditions remain tight. Investors should be aware of these developments and adjust their investment strategies accordingly.

Conclusion

The liquidity situation for central banks has an impact on the cryptocurrency market, and investors should be careful as they navigate this market. As we have seen, the decline in money supply and bank deposits has already caused some downward pressure on cryptocurrency prices. We can expect this trend to continue as central banks tighten their policies further. However, in the long run, cryptocurrencies are expected to transition to a more stable, trading orientation mode similar to gold and Treasury bonds.

FAQs

#Q1. What is the liquidity situation of central banks?

A1. The current liquidity situation of central banks is tight, and this is expected to have a bearish impact on risky assets like cryptocurrencies.

#Q2. What is the Bloomberg Galaxy Cryptocurrency Index (BGCI)?

A2. The Bloomberg Galaxy Cryptocurrency Index (BGCI) is an indicator of the performance of cryptocurrencies in the market.

#Q3. Should investors be cautious when investing in cryptocurrencies?

A3. Yes, investors should be cautious when investing in cryptocurrencies, especially in the current market where the liquidity situation is tight.

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