As an experienced financial analyst, I strongly believe that Holger Zschaepitz’s analysis on the correlation between net U.S. liquidity and growth-oriented assets such as technology stocks and cryptocurrencies is a valuable insight worth considering.
As a researcher studying financial markets, I recently came across an insightful observation from Holger Zschaepitz, a veteran financial analyst. He brought attention to the significant influence that net U.S. liquidity has on growth-oriented assets such as technology stocks and cryptocurrencies.
On May 6, Zschaapitz posted on social media alongside the comment “It’s the liquidity, foolishness!” a chart from Bloomberg illustrating the connection between changes in US net liquidity and Bitcoin‘s price trends over the previous ten years.
What is Net U.S. Liquidity?
The total liquidity in the US economy refers to the amount of funds that are readily available after factoring in financial obligations. This calculation takes into account actions by the Federal Reserve, such as asset purchases which boost liquidity, as well as reverse repo agreements and Treasury General Account balances that can reduce it. In simpler terms, net U.S. liquidity represents the amount of ‘extra’ or ‘accessible’ money circulating in the economy for investment and spending without triggering inflation.
Impact of Net U.S. Liquidity on Risk Assets
Investment assets that carry higher risks, such as tech stocks and cryptocurrencies like Bitcoin, are strongly influenced by fluctuations in U.S. net liquidity. According to Zschaepitz’s research, supported by a Bloomberg graph, these assets often mirror shifts in U.S. net liquidity. When liquidity is plentiful due to expansive monetary policies or other means of increasing liquidity, the prices of risk assets typically increase. On the other hand, reductions in net liquidity can lead to price drops.
The chart from Zschaepitz on Bloomberg demonstrates the relationship between net U.S. liquidity (represented in blue) and Bitcoin’s price (yellow) from 2014 to 2024. Notably, when net U.S. liquidity increases, as a result of quantitative easing or other similar Fed actions, Bitcoin prices typically experience bullish trends. This graph is an essential signpost, illustrating the significant influence Federal Reserve policies have on Bitcoin’s market performance.
The Link to Central Bank Policies
As a crypto investor, I recognize the crucial significance of central bank policies, specifically those implemented by the U.S. Federal Reserve, in shaping net U.S. liquidity trends. Central bank policies act as a key determinant, enabling expansive or contractive measures through interest rate adjustments and balance sheet modifications. These shifts are closely monitored by investors due to their substantial influence on risk asset appeal and overall market performance.
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2024-05-06 14:10