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Net Liquidity and Moving Averages
One of the most useful models for tracking the cyclical highs of the S&P 500 and bitcoin since March 2020 has proven to be net liquidity, an original model of 42 Macros. Net liquidity tracks changes in the total assets of the Federal Reserve, the general account balance of the US Treasury and the reverse repurchase facility. Lower net liquidity translates into less capital available to deploy to markets. We find it useful as a key macroeconomic indicator to gauge current liquidity conditions and how bitcoin is trading in the market.
Bitcoin has acted as a liquidity sponge throughout its life, and the contraction in liquidity across all markets has had a significant impact on Bitcoin’s price and trajectory. Ultimately, this is a key driver of our fundamental long-term thesis that bitcoin’s growth depends on an environment of perpetual currency depreciation and liquidity expansion to combat current levels of unsustainable sovereign debt and deflationary forces. In the short term, it is unclear when global liquidity will increase massively again. This is the trillion dollar question and the topic of conversation that everyone speculates on. Net Liquidity provides a view of this trajectory as a metric updated weekly with new data.
Bitcoin is experiencing one of its greatest relative strengths since January 2021, but it also comes at a time when we are seeing a significant daily increase in net liquidity after a period of historically low volatility. The increase is due to a much lower repo balance since the beginning of the year. With the Fed’s ‘higher for longer’ stance, a projected 3.5% core CPI view for 2023, and continued balance sheet trickle, we’re likely to see a net decline in liquidity – unless there is a a spontaneous or emergency policy reversal.
The price broke above the price realized by the short-term holder. This has only happened a few times in this bear market and these events were short-lived. As this price reflects the average on-chain cost of the most recent buyers, it will be essential to see if these market players are looking to sell here at cost or if they will stick around to build momentum.
The 200-day moving average may seem somewhat arbitrary, but the simple fact that many technical traders and momentum and trend-based investors watch this level gives it significance. A clear break above could mean continued strength for bitcoin in the days and weeks ahead.
The price action to start the new year was a pretty promising sign for Bitcoin bulls. Likewise, over the past week, the percentage shorts of futures closeouts have reached their highest level in the history of the data. Although shorts have been decimated lately, it is likely that this immediate upside can be capped.
While there is still a long way to go to surpass previous bull market highs, year-to-date performance is encouraging after a year in which the industry all but imploded.
All in all, it’s a promising start to 2023.
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