If You Have Crypto, You Need To See This! (Alarming Data)

Global liquidity markets may have reached a critical inflection point, signaling potential volatility for Bitcoin and broader risk assets, according to new analysis utilizing the framework of renowned macroeconomist Michael Howell. While total global funding capacity has swelled to $186 trillion, a sharp deceleration in growth momentum suggests the current market cycle could be facing an early peak, complicating the outlook for investors expecting a sustained bull run through 2026.

Key Points: Liquidity Trends and Market Impact

• Liquidity Growth Slowing: Despite global liquidity reaching $186 trillion (up $14 trillion year-over-year), the 3-month annualized growth rate has plummeted to 1.3%.
• Bitcoin Correlation: Historical data indicates Bitcoin prices typically peak when the rate of change in liquidity drops, often preceding the peak in total liquidity volume.
• Central Bank Divergence: A tug-of-war exists between the Federal Reserve and People's Bank of China (expanding liquidity) versus the ECB and Bank of Japan (tightening).
• Projected Timeline: Based on the 65-month liquidity cycle, the next cycle low is projected for March 2028, placing the theoretical mid-cycle peak between mid-2025 and early 2026.

The Liquidity Cycle: Context and Current Status

Financial markets largely operate on a 65-month cycle of global liquidity—a metric that measures the total funding capacity across the financial system. According to the framework developed by CrossBorder Capital’s Michael Howell, the current cycle bottomed in October 2022. Since then, liquidity has rebounded significantly.

However, recent data suggests the "rising tide" may be losing force. While the sheer volume of liquidity remains high, the momentum driving it is fading. Analysts track the 3-month annualized growth rate as a "nowcast" to gauge the immediate health of the financial system. This metric has recently contracted to just 1.3%, a stark contrast to the 8.1% growth seen over the trailing 12 months.

This deceleration is critical for cryptocurrency investors. Bitcoin is often described as the purest gauge of global liquidity, reacting faster to changes in monetary conditions than traditional equities.

"What we see clearly is that global liquidity generally goes up, and Bitcoin price generally goes up... But if we overlay Bitcoin peaks, we notice that every time Bitcoin peaks, it does so before global liquidity peaks."

Analyzing Central Bank Divergence

The trajectory of global liquidity is currently being pulled in opposing directions by the world's major central banks. This divergence creates a complex environment for forecasting asset prices for the remainder of 2025 and into 2026.

The Tightening Front: Europe and Japan

Both the Bank of Japan (BOJ) and the European Central Bank (ECB) are engaging in policies that effectively drain liquidity from the system. Japan has been executing aggressive Quantitative Tightening (QT), with its balance sheet shrinking significantly. Although the BOJ has signaled it may slow this pace starting in April 2026, the immediate impact is a reduction in available capital. Similarly, the ECB is projected to drain approximately $500 billion in securities, reducing its balance sheet by 11% by year-end.

The Expansion Front: The U.S. and China

Counteracting these drains are policy shifts in the United States and China. On December 10, the Federal Reserve announced a "Reserve Management Purchases" program. While the Fed explicitly states this is not Quantitative Easing (QE), the mechanics involve purchasing $40 billion in Treasury bills monthly, potentially totaling $480 billion over 12 months. This expands the Fed's balance sheet, moving it from a tightening stance to a net-neutral or slightly expansionary one.

Simultaneously, the People's Bank of China (PBoC) has committed to a moderately expansionary monetary policy through 2026, utilizing interest rate cuts and liquidity injections to stimulate growth. Additionally, a weakening U.S. Dollar—which has dropped against the Euro, Pound, and Yuan—technically boosts global liquidity figures when non-USD assets are converted back into dollar terms.

Three Scenarios for the Market Forward

Given the conflicting signals between falling momentum and specific central bank injections, analysts have outlined three potential paths for the coming months.

1. The Early Peak (Bearish)

In this scenario, the Fed’s bill purchasing program is insufficient to offset the liquidity drains from Europe and Japan. The momentum continues to fade, confirming that the cycle peak occurred earlier than anticipated. Under these conditions, risk assets would likely face downward pressure as the "tide goes out."

2. The Cycle Extension (Bullish)

Here, the liquidity cycle extends, pushing the true peak into late 2025 or 2026. This would likely be driven by continued weakness in the U.S. Dollar and aggressive stimulus from China outperforming expectations. In this environment, risk assets—particularly Bitcoin—could see a significant resurgence, potentially targeting projected highs well above current levels.

3. The "Something Breaks" Pivot

The third scenario involves a systemic shock—such as a spike in bond market volatility (measured by the MOVE index) or a collapse in labor markets. Such an event would force the Federal Reserve to abandon "technical adjustments" and pivot to full-scale Quantitative Easing. While this would eventually cause liquidity to explode upward, it would likely be preceded by severe market volatility and economic distress.

"If the MOVE index starts spiking back above 100, that signals collateral stress is returning, a warning light for a liquidity shortage."

What to Watch Next

Investors should closely monitor the intersection of economic data and central bank policy in the coming quarter. Key indicators include the U.S. PMI (Purchasing Managers' Index) and unemployment rates, which currently suggest a softening economy.

Furthermore, the efficacy of the Fed’s reserve management program will be tested. If the Fed is forced to increase buybacks or shift to purchasing longer-dated coupons, it would serve as a clear signal of escalating liquidity needs. Until a definitive trend emerges, the market remains at a crossroads between a cyclical downturn and a liquidity-fueled extension.