Earlier today, Holger Zschaepitz, a seasoned financial analyst, highlighted the profound impact of net U.S. liquidity on growth-oriented assets like technology stocks and cryptocurrencies.

Accompanying his statement, “It’s the liquidity, stupid!” on social media on May 6, Zschaepitz shared a Bloomberg chart that visually correlates the fluctuations in net U.S. liquidity with Bitcoin’s price movements over the past decade.

What is Net U.S. Liquidity?

Net U.S. liquidity refers to the overall liquidity available in the United States after accounting for financial obligations. This measurement considers factors such as the Federal Reserve’s balance sheet activities (like asset purchases which increase liquidity), and operations like reverse repo agreements or Treasury General Account (TGA) balances that might drain liquidity. Essentially, net U.S. liquidity is a snapshot of how much ‘free’ or ‘usable’ money is circulating within the economy that can be readily used for investment and spending without causing inflationary pressures.

Impact of Net U.S. Liquidity on Risk Assets

Risk assets, which include volatile investment options like tech stocks and cryptocurrencies, are acutely responsive to changes in net U.S. liquidity. Zschaepitz’s analysis, backed by a Bloomberg chart, clearly demonstrates that Bitcoin and similar assets frequently move in tandem with shifts in net U.S. liquidity. When liquidity is high, owing to expansive monetary policy or other liquidity-boosting measures, Bitcoin’s prices tend to rise. Conversely, contractions in net liquidity often result in price declines.

The Bloomberg chart provided by Zschaepitz compares the trajectory of net U.S. liquidity (shown in blue) against Bitcoin’s price (in yellow) from 2014 to 2024. It reveals that periods when net U.S. liquidity is augmented, such as through quantitative easing or other Fed measures, often coincide with bullish trends in Bitcoin prices. This visual representation serves as a crucial indicator of how closely tied Bitcoin’s fortunes are to the liquidity conditions set predominantly by Federal Reserve policies.

The Link to Central Bank Policies

The role of central bank policies, particularly those of the U.S. Federal Reserve, is central to understanding fluctuations in net U.S. liquidity. These policies determine the scale and scope of liquidity-enhancing or liquidity-withdrawing actions, such as adjusting interest rates or altering the size of the balance sheet. Investors closely monitor these policy shifts as they can significantly impact the attractiveness and performance of risk assets.