The financial markets have seen a resurgence of risk-taking since the last quarter of 2022. However, as key indicators suggest potential fiat liquidity pressures, experts are advising caution. Bitcoin (BTC), the top cryptocurrency by market capitalization, has seen its value double from a low of $15,500 in November to $31,000, thanks to factors such as Fidelity’s application for a spot-bitcoin ETF.

Resurgence of Risk-Taking in Financial Markets

Simultaneously, Wall Street’s tech-centric Nasdaq index has rallied almost 50% since its low point in late 2022, with the broader S&P 500 index gaining 25% over the same period. However, widely-followed fiat liquidity metrics such as the Fed net liquidity indicator and the global net liquidity indicator are showing a downward trend, warns Lewis Harland, Portfolio Manager at Decentral Park Capital.

Bitcoin’s Bullish Trend Amidst Market Liquidity Concerns

Market liquidity measures, both globally and domestically in the U.S., are pointing lower. It would be unusual for Bitcoin to maintain its bullish trend with both liquidity measures expected to decline in the coming weeks. Fiat liquidity conditions have a significant influence on risk assets like Bitcoin and stocks. In the past, changes in fiat liquidity conditions have marked significant highs and lows in the market valuations of risk assets.

Nasdaq and S&P 500 Rally Despite Liquidity Indicators

Harland expresses caution for Bitcoin despite the bullish consensus market view, believing this aspect is being overlooked by investors. The fiat liquidity measures are signaling challenging times ahead for risk assets, including cryptocurrencies. The global net liquidity indicator, which takes into account the fiat supply of several major economies, has fallen to $26.5 trillion, the lowest since November 2022.

The Impact of Fiat Liquidity Measures on Bitcoin and Stocks

The Fed net liquidity indicator, which measures the amount of U.S. dollars available in the system, has dropped to $6 trillion from $6.3 trillion a few weeks ago. Bank reserves held at the Federal Reserve (Fed) are also decreasing, indicating potential risk aversion.

Investor Caution Amidst Bullish Market Sentiment

The MSCI All Country World Index (ACWI) and the total assets of the big five central banks (the Fed, ECB, BOJ, PBOC, and BOE), another measure of fiat liquidity, are showing a similar divergence. The combined balance of the big five central banks is contracting again, signaling liquidity pressures for risk assets.

Global Net Liquidity Indicator Signals Potential Downturn

As central banks begin to roll off liquidity, it may pose a headwind moving forward, particularly with U.S. Treasury issuance pulling more liquidity out of the market. This divergence between stocks and central bank balance sheets is noted by pseudonymous macro trader and investors Markets & Mayhem.