Forward the original title ‘Besides the Federal Reserve’s Interest Rate Cuts, Another Important Data Point Deciding the Future of Crypto Market | BK Weekly #23’

TL;DR

After a week of fluctuating tariff tensions, the market finally found some breathing room over the weekend. However, it remains uncertain how long this respite will last, as tariff issues are event-driven and lead to risk aversion and a temporary collapse of sentiment, resulting in significant volatility. Once the market confirms the fundamental changes caused by tariffs and the release of risk-averse sentiment, the entire financial market will find a new equilibrium. This is why global stock markets, especially U.S. stocks, ended last week with gains, as evidenced by the changes in the S&P 500 volatility index.

Last week, the VIX index reached a recent high, and the only events in the past few years that can compare to it are the extreme spike caused by the Bank of Japan’s interest rate hike last year and the financial turmoil caused by the pandemic in 2020. This is why the market experienced such large fluctuations in the past week, as such occurrences are rare in history.

Now, once this huge volatility subsides, the factors influencing the Crypto market’s trend will return to the familiar topics of “inflation” and “interest rate cuts,” because only interest rate cuts can bring about “flooding the gold mountain” and offer growth hopes for risk assets led by BTC.

By comparing the global broad money supply (M2) with BTC’s performance over the past 10 years, we can analyze this correlation. The chart below shows how BTC’s massive increase in the past decade is built on the foundation of a surge in global M2, and this correlation far exceeds that of other financial data.

This is why whenever the U.S. is about to release data related to inflation or interest rate cuts, BTC tends to experience fluctuations, because it ultimately affects whether new funds will enter the Crypto space.

However, at the moment, the Crypto market seems to be focusing mostly on the Fed’s interest rate cut path, while overlooking another important piece of data—the PBOC’s asset size, which reflects the current liquidity of China’s currency.

While everyone is focused on the financial markets on the West Coast, they are neglecting our own financial liquidity. In fact, it is just as closely linked to BTC’s price fluctuations, after all, we are a major global power.

The chart below shows the correlation between BTC’s price movements in the past three cycles and the growth of the PBOC’s asset size. It is clear that this correlation has been evident during every major BTC surge and corresponds to the four-year cycles.

PBOC’s liquidity played a role in the Crypto bull market of 2020-2021, the bear market of 2022, the recovery from the cycle low in late 2022 to early 2023, the surge in the fourth quarter of 2023 (before the BTC ETF approval), and the correction from Q2 to Q3 in 2024.

Similarly, a few months before the 2024 U.S. election, PBOC’s liquidity turned positive again, leading to a “election bull” phase.

However, as seen in the chart below, the PBOC’s asset size started to decline after September 2024, bottoming out at the end of the year before rebounding and reaching a high not seen in the past year. From a data correlation perspective, changes in PBOC liquidity usually precede significant fluctuations in BTC and the Crypto market.

Interestingly, during the BTC bull market of 2017, the Federal Reserve was not the one “flooding the market.” Instead, it raised interest rates three times that year and engaged in quantitative tightening. However, risk assets, led by BTC, still performed very optimistically in 2017 because the PBOC’s asset size reached a new high that year.

Even in terms of the S&P 500’s growth, there is a certain correlation with PBOC’s liquidity. Historically, the correlation coefficient between PBOC’s total asset size and the S&P 500’s annual performance is around 0.32 (based on data from 2015-2024).

Of course, in a sense, this is also because the time windows of the PBOC’s quarterly monetary policy report and the Fed’s interest rate meetings overlap, which amplifies the correlation in the short term.

In summary, we can see that, in addition to closely monitoring the U.S.’s monetary easing actions, we also need to pay attention to domestic financial data changes. A week ago, news was released stating: “Tools like reserve requirement ratio cuts and interest rate cuts have ample room for adjustment and can be implemented at any time.” Our task is to track these changes.

It’s worth noting that, as of January 2025, China’s total deposits amount to 42.3 trillion USD, while the U.S. deposits stand at around 17.93 trillion USD. It’s undeniable that, in terms of deposit size, we have more financial potential. If liquidity improves, it could bring about some changes.

Of course, another point worth exploring is whether, if liquidity increases, it can flow into the crypto market. There are still some restrictions, but Hong Kong has already provided an answer. From the perspective of policy flexibility and convenience, things have changed compared to a few years ago.

Finally, to end this week’s review, I’ll borrow a quote from Lei Jun: “When the wind rises, even pigs can fly.” It’s better to ride the wave than to row against the current. What we need to do, besides waiting, is to dare to climb when the wind blows and soar against the wind.

Disclaimer:

1. This article is reprinted from [Blockchain Knight]. Forward the original title ‘Besides the Federal Reserve’s Interest Rate Cuts, Another Important Data Point Deciding the Future of Crypto Market | BK Weekly #23’. The copyright belongs to the original author [Blockchain Knight]. If you have any objections to the reprint, please contact Gate Learn team, the team will handle it as soon as possible according to relevant procedures.

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