Bitcoin’s Price Faces Significant Liquidity Threat: Insights and Future Outlook

Cryptonews Economy John Brightwater September 14, 2024

Bitcoin’s Price Faces Significant Liquidity Threat: Insights and Future Outlook

Summary
Bitcoin’s price faces challenges from an expected Net Federal Reserve liquidity drop, estimated between $300 billion and $550 billion, projecting a negative impact on risk assets. A potential recovery may occur in October, supported by current technical indicators and historical performance trends. However, supply dynamics and market participation levels indicate caution is warranted moving forward.

Bitcoin’s price is currently facing considerable market fluctuations, primarily resulting from an anticipated drop in Net Federal Reserve liquidity projected for the latter half of September. Esteemed analyst Tomas has estimated this liquidity drain to be between $300 billion and $550 billion, which could negatively impact risk assets, including Bitcoin, gold, and the S&P 500 index. Over the past four years, a strong correlation has existed between Net Federal Reserve Liquidity and Bitcoin, though this relationship may evolve at any moment. Historically, significant reductions in liquidity have adversely affected Bitcoin prices, often resulting in downward pressure on the market. However, a potential reversal is expected on October 1, potentially paving the way for a recovery in Bitcoin’s price. Analysis of Bitcoin’s daily performance from September 2022 to August 2024 indicates an average positive performance of +0.26%. Still, during periods of significant Fed liquidity reductions, this figure has dropped to -0.13%, highlighting the detrimental effects of lower liquidity on Bitcoin’s valuation. Despite some resilience observed in Bitcoin during specific liquidity withdrawals, the cryptocurrency has generally trended downward or remained stable alongside declines in Net Fed Liquidity since 2020. This trend is likely to persist unless the Federal Reserve alters its current course of Quantitative Tightening (QT). Insights from the upcoming FOMC meeting on September 18 may provide further clarity on QT and its implications for future liquidity and Bitcoin’s pricing strategies. Recent technical analysis reveals that Bitcoin’s price has surpassed the 4-hour 200 exponential moving average (EMA), currently trading at $60,000 after rebounding from a support level of $52,000. This movement above the 200EMA suggests the possibility of higher prices in the short and medium terms, particularly given the current market momentum and strength observed. If Bitcoin maintains this level, it could sustain its upward trajectory into October, even as liquidity reversals loom. Moreover, current Bitcoin supply dynamics exhibit significant divergence, with approximately 19.8 million BTC in circulation, out of which 14.6 million BTC, accounting for 73%, is categorized as illiquid supply. The illiquid supply refers to Bitcoin held by entities that infrequently trade or move these assets, effectively removing them from the market. This increasing illiquid inventory decreases overall market liquidity. Conversely, the liquid and highly liquid supply totals about 5.2 million BTC, actively traded and readily accessible in the marketplace. This disparity between liquid and illiquid supply adds a layer of complexity to Bitcoin’s pricing behavior. Despite an all-time high in transaction volume, a notable decline in active addresses has been recorded, which stands in stark contrast to previous bullish phases where increases in transaction counts typically coincided with an uptick in active users. This divergence, as noted by Glassnode, signals a potential shift in market behavior that may impact Bitcoin’s pricing moving forward. Overall, while Bitcoin’s price appears set for an upward movement, liquidity trends and supply dynamics will remain pivotal factors in shaping its trajectory.

The financial landscape surrounding Bitcoin is significantly influenced by Federal Reserve policies, particularly in relation to liquidity management. Net Federal Reserve Liquidity represents the amount of funds available in the economy, affecting interest rates, risk appetites, and asset values. Historical trends indicate that as liquidity decreases, riskier assets such as Bitcoin tend to face downward pricing pressures. Conversely, increases in liquidity typically bolster asset prices, providing an avenue for potential recovery. Analysts continually monitor these trends, particularly in relation to upcoming Federal Open Market Committee (FOMC) meetings and their implications on Quantitative Tightening (QT) initiatives. Given that Bitcoin is viewed as a risk asset, shifts in liquidity directly correlate with its market performance and investor sentiment.

In conclusion, Bitcoin is currently navigating significant challenges posed by anticipated drops in Net Federal Reserve Liquidity. While historical trends indicate downside pressure during similar periods, there are signals of possible recovery ahead. The technical analysis suggests that Bitcoin could stabilize around current price levels, especially if liquidity conditions improve post-October. However, the current imbalance between illiquid and liquid supply, combined with a decline in active user participation, raises concerns regarding sustained upward momentum. Investors must remain vigilant to liquidity trends and overall market behavior as they determine Bitcoin’s future direction.

Original Source: ambcrypto.com