The Impact of Central Bank’s Tight Liquidity Situation on Cryptocurrencies

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

Recently, there have been reports suggesting that the central bank’s tight liquidity situation may have long-term effects on the cryptocurrency market. Bloomberg has warned that cryptocurrencies may experience adjustments due to the sharp decline in M2 money supply and bank deposits, which indicate a lack of liquidity. This article delves into the topic, exploring the implications of the liquidity crisis on the crypto market.

What is Liquidity?

Liquidity refers to the availability of cash or other highly liquid assets to a market or company. It is a crucial factor in the smooth functioning of financial markets and is essential for the growth and development of any economy. In financial markets, it represents the ability of market participants to buy or sell assets without causing a significant change in their price.

The Central Bank’s Tight Liquidity Situation

Due to the COVID-19 pandemic, central banks around the world have adopted an expansionary monetary policy to support their respective economies. However, the Central Bank’s liquidity injection has not reached the real economy, causing a liquidity crisis in the banking system. The decline in bank deposits and M2 money supply has raised concerns about the long-term impact of the liquidity crisis on financial markets, including cryptocurrencies.

Bloomberg’s Warning about Cryptocurrencies

Bloomberg is one of the leading financial market players globally, providing financial news, data, and analysis to financial professionals and investors worldwide. Bloomberg has warned that cryptocurrencies may experience a long-term adjustment due to the central bank’s tight liquidity situation. Bloomberg Intelligence’s Senior Macro Strategist, Mike McGlone, suggested that risky assets tend to rise and fall with the support of liquidity. Therefore, the declining US money supply and bank deposits indicate that cryptocurrencies are facing a headwind.

Why does Liquidity Matter for Cryptocurrencies?

Liquidity plays a crucial role in the functioning of financial markets, including the cryptocurrency market. In the case of cryptocurrencies, it affects their price and their ability to be used as a transactional currency. Liquidity is necessary for market participants to be able to buy and sell cryptocurrencies without causing significant price changes. If there is a lack of liquidity, the price of the cryptocurrency will fall as the sellers outnumber the buyers.

The Impact on Cryptocurrencies

The liquidity crisis may have a long-term effect on the crypto market, as liquidity is an essential factor for the growth and development of the market. The year-on-year measures of money supply and commercial bank deposits have decreased by about 2%, which is the highest value in Bloomberg’s database since 1959. Most central banks are still tightening policies, which may indicate a lower plateau for Bitcoin and the Bloomberg Galaxy Cryptocurrency Index (BGCI).

The Transition of Bitcoin

Despite the impact of the liquidity crisis, it is believed that Bitcoin will transition to a trading mode more like gold and treasury bonds. This means that it will become less volatile and more stable, making it an attractive investment for those who are looking for a safe-haven asset. The transition to trading mode may take some time, but it is expected to happen eventually.

Conclusion

Liquidity plays a critical role in the functioning of financial markets, including the cryptocurrency market. The central bank’s liquidity crisis may have long-term effects on the market, including Bitcoin and the Bloomberg Galaxy Cryptocurrency Index. Despite the challenges, the transition to a more stable trading mode is expected to happen eventually.

FAQs

Q1. Why is liquidity important for financial markets?

Liquidity is crucial for the smooth functioning of financial markets, as it increases the availability and accessibility of funds, making it easier for investors and traders to buy and sell assets.

Q2. Will the impacts of the liquidity crisis continue to affect cryptocurrencies?

The liquidity crisis will likely continue to impact cryptocurrencies, though the market may eventually transition towards a more stable trading mode.

Q3. What should investors keep in mind regarding the impacts of the liquidity crisis on the cryptocurrency market?

Investors should be aware of the effect that the liquidity crisis may have on the volatility and stability of the cryptocurrency market and adjust their investment strategies accordingly.