Liquidity, and Bitcoin 🚀

Hey Everyone,

One of the biggest factors that drives crypto, and many other asset prices, is liquidity.  

In layman's terms, liquidity is the total amount of money that's available to buy assets.  When liquidity goes up, the demand for assets goes up.  When liquidity goes down, the demand for assets goes down. Pretty simple, right?

So what does this mean for many crypto assets - especially Bitcoin?

When liquidity goes up Bitcoin and other crypto assets tend to go up - a lot.  This happens because demand is increasing, but supply of Bitcoin is barely increasing at all.   As of today Bitcoin supply increases 1.6% a year, and that will be reduced to 0.8% after the halving.  We can see the relationship between the Bitcoin price and liquidity here:

So what drives liquidity?

There are several drivers of liquidity, but the most significant one these days is central banks.  The Federal Reserve in the US is one of the leading central banks in the world.  It has the ability to increase the money supply to stimulate the economy when it has slowed down.  Or, if the economy is overheating, they can withdraw liquidity from the economy. The Fed did this in a big way during the covid crash.  In more recent years, the Fed has also been increasing liquidity when the US government tries to sell treasuries but there aren’t enough buyers.

So where is liquidity likely headed? - The short answer is likely up a lot.  I’m sure it will be a little bumpy but the longer term trend is clear. We’ll dive into this more next week.

Cheers,

Justin

Discover how the US government influences liquidity and explore our crypto portfolio construction and updates with our premium subscription!

Important news and interesting content this week

1. News

   1. Bitcoin etfs continue to see large inflows - Tweet from Jim Bianco 

   2. Avalanche experiences outage but is now up and running again - Blockworks 

   3. Judge signs off on Binance plea deal - Coindesk

2. Interesting content

   1. In depth conversation on liquidity with Michael Howell - Thoughtful Money  

Disclaimer: The Blockchain Breakthrough is not financial advice. Please do your own research.