The global liquidity movement suggests that Bitcoin and certain cryptocurrencies could see an influx of new capital that will benefit the broader market.
At the time of writing, Bitcoin’s [BTC] The market cap was $1.51 trillion, down $139 million from the previous day, while the broader crypto market was $2.53 trillion. Risky assets historically prevail when liquidity flows into the global financial system.
Global liquidity adds $1 trillion this week as bond yields rise
There has been a surge in global liquidity this week, with data from AlphaExtract showing that the total market capitalization rose from $142.4 trillion to $143.4 trillion, a 0.75% increase that represents an addition of $1 trillion to the system.
Global liquidity measures the total amount of money and credit flowing through the global financial system. When it rises, risky assets like stocks and crypto tend to benefit as cheap capital seeks higher returns.
Crypto, as an established risk asset category, could absorb some of this new capital, potentially undoing the current environment in which capital has remained locked up and rotated between assets rather than expanding broadly.
However, this is not a pure signal. Rising 10-year Treasury yields in both the US and South Korea, both reaching record highs not seen in decades, complicate the picture.
Rising bond yields typically signal growing economic concerns, especially around inflation, and increase the likelihood of a rate hike – a factor that has historically weighed negatively on the performance of risky assets.
DXY stabilizes at 100 while Bitcoin reaches negative correlation
Data from AlphaExtract links the recent rise in global liquidity to stabilization in the US Dollar Index, which has found support around the 100 level.
The DXY measures the dollar’s strength against a basket of six major currencies, and a rising DXY typically tightens global liquidity and puts pressure on risky assets, as most global debt and trading is denominated in dollars.
AlphaExtract noted that,
Some of that likely stems from continued DXY stabilization around the critical 100 level after months of weakness.
Tracing the correlation with Bitcoin adds even more context. The DXY is currently forming a symmetrical triangle around the 99.00 to 99.50 level, with the correlation coefficient between the two assets at the time of writing at -0.35.
Under this inverse relationship, a breakout of the triangle below 99.00 would support a bullish case for Bitcoin, while a breakout above 99.50 would add downside pressure.
The DXY is at a decision point, and which side the triangle moves could be one of the most consequential near-term triggers for Bitcoin’s price direction.
The Strait of Hormuz remains an important variable
Geopolitical dynamics continue to play a meaningful role in shaping the performance of risky assets.
The ongoing conflict in West Asia involving the US, Iran and Israel remains a major factor, in addition to the impact of the Strait of Hormuz on global oil prices.
Although the current ceasefire has reduced market volatility, the Strait of Hormuz remains important in the broader economic picture.
An open strait that allows free passage of crude oil would lower oil prices, improving overall economic sentiment and increasing investors’ willingness to invest capital in risky assets like Bitcoin.
Final summary
- Global liquidity rose 0.75% this week, although rising bond yields in the US and South Korea dampened the signal for risky assets.
- The DXY forms a symmetrical triangle at 99.11 with a Bitcoin correlation of -0.34, and a breakdown below 99.00 could be bullish for Bitcoin.