if you’ve spent any time scrolling through crypto
Twitter recently you’ve probably seen countless charts claiming that crypto prices closely follow
global liquidity but how accurate is that claim how exactly do you measure liquidity and why
does it have such a profound effect on the crypto markets well today we’re breaking down precisely
what liquidity means how it shapes crypto markets and most importantly how you can use this
knowledge to your advantage trust me folks this is a video you do not want to miss right let’s
start by making clear what liquidity actually is because this term gets thrown around a lot these
days put simply liquidity is just a fancy term that refers to how much money is flowing through
the economy and financial markets at any given time think of liquidity as the fuel when there’s
plenty of fuel asset prices typically climb higher when fuel runs low markets tend to stall or
worse experience a downturn and this explains why liquidity has become the hot new indicator
that everyone is watching closely now to properly grasp how liquidity flows through the markets
there’s an analogy here that could be helpful imagine the financial system as a giant swimming
pool at the shadow end you have your lowest risk assets and these are things like government
bonds and high-grade corporate debt investors usually start here whenever there’s new liquidity
entering the system why well uh because bonds especially US government bonds are considered
among the safest assets in the global financial system however for this liquidity to flow into
the deeper parts of the pool macro conditions need to be neutral to bullish and you can think
of these macro conditions as how calm the water is when the water is calm i.e meaning there’s
minimal political or geopolitical uncertainty there’s strong employment and controlled inflation
liquidity naturally moves deeper into the pool under these calmer conditions investors become
more confident and start moving towards medium risk assets such as stocks and these assets offer
investors more potential upside than bonds but they’re also riskier and more sensitive to changes
in the broader economy finally at the deepest end of the pool you’ve got high risk assets like
cryptocurrencies a crypto tends to attract liquidity only after investors have grown very
confident and risk tolerant however because the water is choppier out at this deep end confidence
can vanish rapidly when macro conditions worsen due to geopolitical tensions political instability
or economic downturns liquidity then quickly flows back out resulting in the sharp and sudden
price crashes we’ve all become accustomed to in the crypto markets this analogy highlights an
essential point crypto is particularly sensitive to liquidity changes precisely because it occupies
the riskiest part of the financial pool and research from liquidity experts suggests that it
can take as long as 2 months for new liquidity to find its way into the crypto markets yet when
market conditions become uncertain liquidity can exit crypto markets far more quickly than it
entered now something important to remember here is that liquidity itself isn’t straightforward to
measure while plenty of crypto Twitter analysts swear by specific indicators no single measurement
perfectly captures the full picture and that’s because liquidity isn’t driven solely by one
factor it’s influenced by many moving parts including central bank policies commercial banking
activity fiscal stimulus from governments and even market psychology and most importantly of all
guys if you’re enjoying this video so far then try to measure liquidity like tracking global M2
money supply and the global liquidity index among others and which brings us to the next logical
question and that is how do you measure liquidity and perhaps more importantly how can you follow
it yourself as I mentioned earlier liquidity isn’t something you can measure perfectly with
just one indicator because it’s shaped by many complex forces thankfully there are a few proven
metrics that can reliably show you the direction liquidity is flowing even if no single indicator
provides the entire picture the first indicator that many analysts rely on is the global M2 money
supply now without getting overly technical a global M2 simply refers to the total amount of
easily accessible money floating around major economies things like physical cash checking
accounts savings deposits and money market instruments analysts typically use global M2 as
a way to figure out whether liquidity conditions are generally improving or deteriorating and it’s
a good place to start particularly because it’s measured in the US dollar terms which is the
world’s reserve currency meaning it directly influences global financial conditions however
one major limitation of the global M2 indicator is that it only measures the total amount
of accessible money available in the economy but doesn’t account for how freely or how quickly
that money is actually circulating or being spent for instance during times of economic uncertainty
or geopolitical tensions investors and consumers often hold on to cash rather than spend it or
invest it meaning liquidity doesn’t actively reach riskier markets like crypto and that’s why
some analysts prefer using a more comprehensive liquidity indicator like Michael Howell’s global
liquidity index or GLI howell’s GLI specifically tracks liquidity by measuring the short-term
liabilities of banks and shadow banks as well as cash flows from households and corporations
put simply the GLI directly captures how much money is actually flowing through the private
financial sector giving a clearer realworld view of global liquidity conditions and what makes
Howell’s indicator particularly valuable is its impressive predictive track record as his
research has consistently managed to forecast major liquiditydriven market shifts months ahead
of time currently How expects global liquidity to peak somewhere around the third quarter of 2025
which uh as it so happens lines up closely with many predictions for this cycle top sometime
later this year and if you’re curious to see what we’re expecting for 2025 then be sure to
check out our dedicated video on that right over here i digress in practice though the best
strategy isn’t just picking one indicator and running with it instead experienced investors
tend to cross reference multiple sources for instance if global M2 is rising the GLI is rising
and other analysts you trust say Julian Pitt from Real Vision or Ben Cowan are all pointing
to bullish liquidity conditions you probably have a reliable signal emerging speaking of
Ben Cowan he’s recently made an interesting point suggesting that crypto markets might
sometimes frontr run global liquidity measures in other words investors anticipate improving
liquidity conditions and start pricing in future liquidity growth ahead of time causing
crypto prices to either match or temporarily run ahead of existing liquidity measures that said
while liquidity indicators aren’t about pinpoint accuracy they’re incredibly useful tools for
understanding overall market conditions keeping an eye on Global M2 Michael Howell’s GLI and
insights from reputable analysts provides a well-rounded picture helping you anticipate when
crypto markets might surge or stumble oh I didn’t measuring liquidity let’s dive straight into why
liquidity has such a profound impact on crypto prices to properly grasp this we need to start by
thinking about investor psychology and leverage two factors that have the practical effect of
amplifying liquidity’s effect first up investor psychology now crypto markets more than almost any
other asset class are driven heavily by fear and greed when liquidity is abundant investors become
optimistic comfortable with taking risks and they naturally drift into crypto after all Bitcoin
and other cryptocurrencies more broadly have historically been one of the best performing asset
classes and everyone wants a piece of that action however this optimism quickly escalates into
greed when investors see prices rising they don’t just buy with their available cash they
start borrowing money to buy even more crypto confident prices will just keep on going up and
this phenomenon is known as leverage and in crypto leverage is everywhere traders open leverage
positions on exchanges institutions borrow money from banks and crypto whales borrow against their
Bitcoin and Ethereum holdings to invest in riskier altcoins initially leverage makes crypto prices
sore far beyond what pure liquidity alone would suggest and this is why during bull market peaks
a cryptocurrencies tend to decouple to the upside from liquidity indicators with BTC and altcoins
skyrocketing to levels that seem irrational but here’s the problem leverage cuts both ways when
liquidity conditions begin to tighten crypto investors especially those who’ve borrowed
heavily can face margin calls they’re often forced into selling their positions triggering
large-scale liquidations this forced selling conversely accelerates price declines far beyond
what liquidity indicators would typically suggest consider the crypto market crashes we’ve seen
previously like in 2022 following the collapse of FTX these downturns weren’t just caused by
reduced liquidity they were magnified massively by leverage the sudden evaporation of borrowed
money forced Wales and traders to liquidate their positions creating severe downward pressure
on prices now it’s worth remembering a crucial point highlighted by analysts like Lynn Alden over
longer periods of time say months to years Bitcoin remains highly correlated with global liquidity
but in shorter periods cryptospecific factors like leverage and speculative excesses often cause
substantial deviations both upwards and downwards onchain metrics can also give clear evidence for
these leveraged driven market extremes but uh more on that in a bit in other words liquidity sets
the direction but leverage and investor psychology determine how extreme price moves become it’s not
just about how much liquidity is in the system but also how aggressively investors are borrowing
and speculating based on that liquidity now by this point you’re no doubt wondering what actually
influences liquidity itself well broadly speaking liquidity flows are influenced by two distinct
sources macroeconomic factors and cryptospecific sources let’s begin by exploring the macro side
as it’s typically where most liquidity originates now most people assume that liquidity primarily
comes from central banks and to be fair they’re partly right central banks create liquidity in two
main ways firstly through quantitative easing or QE which basically means central banks printing
money and using it to buy financial assets like government bonds and this pushes down bond
yields making borrowing cheaper for everyone and the second way is by directly lowering
short-term interest rates which makes lending cheaper and encourages borrowing and increases
the overall supply of money available in the economy but central banks aren’t the only players
in the liquidity game commercial banks also play a crucial role and they’re often misunderstood
commercial banks create liquidity through lending specifically by borrowing short-term money
at low interest rates and then lending it out longer term at higher interest rates pocketing
the difference interestingly commercial banks don’t always directly follow central bank policies
even when central banks raise short-term interest rates to reduce borrowing and slow down the
economy commercial banks don’t always follow suit immediately by increasing the rates they
pay on customer deposits instead they often keep these deposit rates low even as loan rates
rise and this approach widens the difference or spread between what banks pay depositors and
what they earn from lending out that money as a result banks can remain profitable
continuing to lend and inject liquidity into the economy even when central banks tighten
monetary policy then of course we have government spending itself governments typically spend
money they’ve raised by issuing bonds so when governments actively spend like stimulus checks or
infrastructure projects it injects money directly into the economy boosting liquidity however
when governments reduce spending or actively refill their Treasury accounts by issuing new debt
liquidity can temporarily tighten and we’ve seen this dynamic clearly illustrated in the recent
US debt ceiling showdown the inability to issue new debt has forced the government to draw down
its Treasury general account temporarily adding liquidity into the markets however when the debt
ceing is eventually raised refilling the account could quickly reverse the effect of removing
liquidity from the system beyond government and banking activity there’s another powerful source
of macro liquidity rising asset prices essentially when prices of stocks bonds real estate or crypto
rise investors feel wealthier they then use these appreciating assets as collateral to borrow even
more money often reinvesting that money back into the markets and this creates a positive
feedback loop of sorts amplifying liquidity conditions and market optimism but here’s an
important caveat macroeconomic uncertainty can quickly disrupt liquidity flows factors like
bond market volatility political instability or tariff disputes can make investors hesitant for
example when US government bonds which act as the global benchmark for collateral become volatile
investors tend to borrow less against these bonds which temporarily reduces liquidity around the
margins now alongside these macro sources crypto markets themselves can generate substantial
internal liquidity and this primarily happens when large crypto holders or whales borrow
stable coins against assets like Bitcoin or Ethereum rather than selling them this borrowed
liquidity often flows directly into altcoins creating cryptospecific liquidity booms and what’s
interesting is that this crypto market cycle could be the first in history where we see widespread
borrowing against major altcoins like XRP and ADA as well as tokenized real world assets or RWAs
for short we might even see new crypto regulations enabling traditional institutions like banks to
offer loans against assets such as Bitcoin ETFs that crypto liquidity isn’t solely reliant
on external money flowing into crypto markets internal borrowing and reinvestment within
crypto can also significantly boost liquidity levels given increased regulatory clarity
and institutional participation in the crypto markets we’re likely to see these cryptospecific
liquidity sources in play more than ever before all right we’ve now covered what liquidity is how
it’s measured why it impacts crypto prices and the key factors influencing liquidity itself however
one crucial question still remains how can you use all this knowledge to actually navigate the crypto
markets well first things first while liquidity is undoubtedly powerful it shouldn’t be the only
tool you rely on as the famous saying goes all models are wrong but some are useful liquidity
measures are incredibly useful but only when combined with other cryptospecific indicators and
onchain metrics onchain data can provide some of the clearest signals to determine when crypto
is getting overheated or oversold relative to liquidity so let’s look at two of the most
important onchain metrics first is Bitcoin hodddle waves and this indicator tracks how long
BTC has been sitting idle in wallets historically at cryptobull market tops we see long-term holders
selling to eager new investors what you might call crypto tourists a sharp decline in Bitcoin’s
one-year hodddle wave often indicates that experienced investors are cashing out at market
peaks suggesting crypto has overshot liquidity conditions and prices might eventually reverse and
then there’s Bitcoin’s market value to realized value zed score or MVRV zed score for short it
essentially measures how much unrealized profit Bitcoin holders currently have and when this
indicator spikes significantly it’s historically been a strong warning sign that the crypto market
is overheating investors sitting on unrealized profits usually rush to lock in gains at the
first sign of trouble causing prices to sharply drop that being said there are dozens of other
useful indicators out there and exploring them in more detail would easily require a dedicated
video on the topic which we also happen to have right over here now by tracking both liquidity
conditions and onchain metrics you can get a clearer picture of market extremes at times when
crypto is likely to deviate sharply upwards or downwards from liquidity fundamentals if liquidity
conditions appear to be supportive but indicators such as the MVRV or hodddle wave suggest the
market is becoming overheated it’s probably a good time to proceed cautiously but liquidity
insights aren’t just useful for timing market exits they can also help you identify entry points
during bare markets crypto prices tend to fall far below the fundamental liquidity levels due to
forced liquidations and investor panic selling during these times liquidity metrics can show
you that the market has overcorrected presenting potentially attractive buying opportunities
however one critical thing to keep in mind here is that the affforementioned new cryptospecific
sources of liquidity could make the next bare market even more severe than the previous cycles
as we saw vividly during the events like the terror collapse and the FTX meltdown massive
leverage can lead to brutal liquidations when liquidity eventually tightens whether due
to interest rates central bank policies or macroeconomic uncertainties the downturn could
become incredibly harsh and that’s exactly why liquidity indicators and onchain metrics should
always be used together by taking advantage of liquidity driven opportunities and keeping a close
eye on leveraged driven risks you put yourself in a strong position knowing exactly when to enter
the market when to lock in those gains and when to safeguard your hard-earned capital now if you
enjoyed that video you’re going to absolutely love our latest one right over here and if you’re
not subscribed to the channel yet you can do so right over here that’s me for now thank you
very much for watching and I’ll see you again
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