Bitcoin: Net Liquidity

Hey everyone and thanks for jumping back Into the cryptoverse today we're going To talk about Bitcoin but within the Context of net liquidity if you guys Like the content make sure you subscribe To the channel give the video a thumbs Up and check out the sale on into the Cryptoverse premium at intothe link is in the description Below let's go ahead and jump in so net Liquidity is this idea that we've Discussed before not only within the Context of of Bitcoin but also within The context of the stock Market and really I I think that while It can be useful for looking at USD Evaluations of risk assets I think net Liquidity is more interesting when you Look at relative valuations of certain Risk assets against other risk assets And I I'll try to explain what I mean But the first thing I want to do is We're just going to pull up the Indicator okay so we have net liquid Right here and if you're not famili Familiar with what this is I'm Essentially adding up the balance sheet Of several different central banks Including not only the the fed you know The United States but also Canada New Zealand Japan China the UK the ECB Australia so those are the ones that We have Included and I'm also subtracting out

The reverse repo and the TGA from the From the United States so by doing all That we get a metric that looks like This okay now to show you a specific Balance sheet if you were to go look at Say the FED right if you were to go look At at this one you can see pretty Clearly that the FED has been reducing The size of their balance sheet really Ever since 2022 there was this pop up Here in March of 2023 I'm sure you guys Remember that but it's mostly been Moving down so why then has net Liquidity not been moving down in the Same manner right you can see that net Liquidity while it has moved down it Hasn't really moved down as quickly as The balance sheet from the Federal Reserve one of the reasons is because When you look at at net liquidity at Least in the United States you also have To consider the reverse repo facility And the treasury general account the TGA And if you do that if you look at say The reverse repo what you'll notice is That it has been aggressive ly coming Down but with reverse repo you almost Have to think about it in reverse if This is going down then liquidity is Being put back into the market so that That for that reason you're subtracting You take total assets from the fed and You subtract out the reverse repo so as Long as this keeps moving down liquidity

Is being continuously pumped in now you Might have seen a lot of people are Talking about when is this going to run Out people are speculating all sorts of Times they used to say it was going to Run out in January obviously we're past That and it's still at half a trillion Uh so I don't know you know I don't know Exactly what the path for it is but you Can see this is one of the reasons that The the the net liquidity hasn't gone Much further down another reason is of Course the treasury general account and I'll go ahead and and paste that in here As well and that looks like this right It's actually gone up recently so the Point is if you take if you take the Balance sheet of the fed and from here We subtract out the reverse repo so let Me pull this up Um that one and then we subtract out the TGA you get something that looks like This right now when you look at this you Can see that that actually looks a lot Similar to This than if you only include the Balance sheet of the FED but there are Still some differences for instance this Was a lower low compared to this which Was a higher low so why is that well Remember we're also looking at the Balance sheet of a lot of central banks Not just the Federal Reserve we also Have Canada so if I pull up that one you

Can see what it looks like sorry that's The wrong one um here's Canada Central The the balance sheet there you can see That it's been going down pretty Steadily um and we also have many many Others one of the ones that's actually Been going up though is China go look at The the balance sheet of um in China you Can see this actually been going up Quite aggressively but one issue is that This is denominated in local currencies Right so if you're going to add up the Balance sheets of various central banks Then you have to convert it back to US Dollars and that's where the dollar Comes into play right like where the Dollar you have you we have to Understand you know what is the dollar Doing and since the dollar has come it It initially came down quite a lot but In recent weeks is starting to go back Up now if it goes up that sucks Liquidity out okay if you think about if If a if a central bank has favorable Conversion to US Dollars then that means There's more purchasing power okay but If the dollar has gained strength Against those local currencies then that Means there's less Pur power from those You know so from those balance sheets of The other central banks so the dollar Also plays a role but at the end of the Day you get a chart that looks like this Right you get a chart that looks like

This and for a long time during a Business cycle especially you know Especially when when the drop begins as Net liquidity goes down for a while risk Assets will track net liquidity right we Can overlay this and and see it pretty Clearly right for a While RIS RK assets like Bitcoin like The S&P will track net liquidity but Every single cycle eventually what we've Seen is there there becomes a Divergence Between them right where one will you Know the risk asset will diverge from Net liquidity and this is a reason why There's a lot of people that really Dismiss the idea of net liquidity Because of this Divergence I mean of Course you could look at prior cycles And say yeah well you know it it does Diverge at some point but given enough Time the asset will tend to go back to That level the problem is that can take Years right and you know if you're if You're counting on that as your Investment thesis and that alone then You could be you know just simply Waiting around four years waiting to see If something actually plays out or not It could be better visualized with say Like the S&P 500 last cycle right I mean If you look at what the S&P let me Switch this over to not a monthly time Frames there's a little bit more Resolution in it um I mean like like

Last cycle you can see that at at some Point the jaws of liquidity opened and Eventually they snap shut right again They they the jaws of liquidity opened Here and then eventually they snap shut So you might look at this and say well What use is it right what use is it if The risk asset in question can diverge From net liquidity and I I think there's Actually a great answer to that question And it all goes back to to what happens In late business cycle types of Environment and what happens is higher Risk assets bleed to lower risk assets Right we've seen that not only have we Seen it with like altcoins bleeding back To bitcoin right if you like at total Three out by Bitcoin not only do you see Total 3 continues to bleed back to Bitcoin but also things like the Russell Are bleeding back to the NASDAQ right You can see this is the Russell going Back down you know bleeding against the NASDAQ and so there's this idea that you Know rather than use net liquidity to Understand risk asset valuations on Their USD pairs you can use net Liquidity to understand likely outcomes Of higher risk assets to lower risk Assets for instance taking a look At the ether Bitcoin pair right the eth Bitcoin pair now I do consider Bitcoin To be a safer investment than ethereum That doesn't mean that I'm not long-term

Optimistic about ethereum's chances but What I do mean is that the ethereum Valuation has been and we've we've Talked about it for years and will Likely continue to bleed back to bitcoin Until we go back to loci monetary policy And when you look at the chart in this Manner it actually seems to line up a Bit a bit more closely right and maybe Switch over The Ether the eth chart to a Line scale and and let me actually move This back so we can actually see you Know really what's going on here um what You'll notice you see here how eth Bitcoin kind of put in a slightly lower Low same idea with net liquidity now Remember net liquidity has nothing to do With the eth valuation right it's Concerned about the balance sheet of C The the the the central bank's balance Sheet and also it does take into account The dollar but you can see pretty Clearly in a chart like this where net Liquidity can be actually useful because It shows you that a higher risk asset in The crypto space ethereum has been Bleeding to a lower risk Asset Bitcoin right and it's and it's Basically mimicking the net liquidity Model where you can see that as net Liquidity goes down so too does the eth Bitcoin Valuation but ethereum Is by a long shot not the riskiest asset

In crypto in fact after Bitcoin it's Probably the safest one after Bitcoin Bitcoin being the safest then ethereum Then there's the altcoin market now if You were to look at it through the lens Of the altcoin Market let me Um pull it up over here and again if you Look at total three just the USD Valuation it tends to line up better With net liquidity but it's still not a Perfect match but what I would say is go Look at total three minus the St you Know minus usdt and then divide that by Bitcoin and when you do something like That you get a chart that looks like This and here you can see how it lines Up a lot more closely I mean it's not Perfect I'm not trying to imply that it Is but here you can really see how Altcoins are bleeding back to bitcoin Right this white line shows relative all Bitcoin valuation And you can see clearly how all Bitcoin Valuations are bleeding and you can also See how net liquidity continues to go Down now all of this is important as an Investor because if you're if you're if You are an investor and you're like and You like taking on risk you always want To know where should you put your money To maximize your risk adjusted returns If you think about what's happened over The last couple of years the Magnificent

S in the S&P 500 is essentially the only Reason why the S&P is even at new All-time highs is because of these few Stocks that have outperformed most of The rest of the market however there are Many times in history where this is Exactly the case where higher risk Assets or sorry where where only a few Stocks in the S&P 500 outperform and Those are the ones that are responsible For taking the S&P higher a lot of People might point to this to say well This is the only reason but that's how It often happens and that's one of the Reasons why out out performing the S&P 500 is incredibly difficult because Unless you can pick the exact stocks That are going to give all the gains There's a good chance that you end up Picking some stocks that just keep on Going down and that's why most hedge Funds do not even keep Pace with the S&P 500 is because they're not better stock Pickers than you know just buying the Index I mean and this is not my just not My opinion I mean this has been proven Time and time again we've seen reports You know at the end of fiscal years Where it'll show you you know how many How many hedge funds have actually Outform that the S&P that year and it's Always really few right and they have a Lot of smart people at these hedge funds I'm sure trying to make all sorts of

Decisions and there are some that do Occasionally outperform but even the Ones that outperform for a while they Tend to not outperform for many many Years in a row again every once in a While you'll find one that does but the Problem is that most of them ultimately Fail to even keep Pace with the S&P 500 So my argument is that you can use this Idea of net liquidity to better Understand which types of assets are Worth owning for the last couple of Years I've reiterated many times that my Crypto portfolio is basically just Bitcoin and I have been very critical of Of alt Bitcoin pairs for a long time I Do want to remind people that there are Always a few altcoins that outperform And I I congratulate anyone who's made a Lot of money in the altcoin market okay A lot of altcoins have moved up off of Their lows and I'm not trying to Diminish the risk that someone took on And then the the the reward that they Received I saw the exact same thing last Cycle and last cycle I was a lot heavier In the alt Queen Market than I am this Cycle but what happened last cycle is I Just saw these altcoins bleed back to Bitcoin in until the FED started to cut Rates so you might wonder well when will Altcoins finally stop this horrendous Downtrend against Bitcoin right when Will it end and one way to view that is

To Simply look at at at interest rates Right I mean you could go look pretty Clearly at interest rates and see right Away that at least last cycle if you Look at last cycle and we pull up say Total three divided by Bitcoin the Altcoin market Um against Bitcoin sorry actually let me pull it up I want to pull it up the other way I Going to pull it up so That so here we have the altcoin market Right against Bitcoin and what I want to Do is I want to Overlay interest rates Onto this Chart so you can see pretty clear Clearly Here that once the FED started to cut Rates right here altcoins were pretty Close to bottoming out against Bitcoin They still had a little bit to go but What's more interesting is if you also Overlay the balance sheet of the Federal Reserve you can see that they started to Increase the size of their balance sheet Precisely at the time that all Bitcoin Pairs finally bottomed out which again Corresponds if we pull up that indicator Again uh net liquidity Indicator right here you can see that That Loosely corresponds to near the Lows in net liquidity so when we think About net liquidity are we using it to Tell us USD valuations of risk assets no

We've talked many times about this with N liquidity and how the jaws of Liquidity will open at some point during The business cycle so if you're only Using liquidity to tell you where the Market's going to go you're probably Going to be in for a bad time but if you Use net liquidity to give you an idea of Where relative valuations of risk assets Against other risk assets are going to Go I think that makes a lot more sense And that way if you're an investor you Can focus your money on the lower risk Assets if you want some exposure to the Upside while also minimizing your Downside risk right and so pretty Clearly right here this is where net Liquidity bottomed in September of 2019 Right you can see that's where net Liquidity bottomed last Cycle and that's precisely where all Bitcoin pairs bottomed out Themselves isn't that Fascinating and so when you look at at a Chart like this it really does make a Lot more sense you he here you can see How altcoins outperformed Bitcoin as net Liquidity went through the Roof but then as net liquidity goes Down all Bitcoin pairs go Down and a lot of people keep calling The top on on bitcoin dominance because Of of you know what they saw happen um Or or sort of they're they're thinking

That altcoins will will perform better This time but my point Is last cycle we can I mean again it's Only one data point but it's it's Technically more than one data point if You think about it because this same Type of idea is could be studied for Various markets going back many many Centuries right the idea that in in late Business cycle environments higher risk Assets bleed to lower risk assets and The reason for that is because the Higher risk asset we are pretty Confident Will Survive What you know whether it's a no Landing Whether it's a soft Landing or whether It's a hard Landing right whatever three Whatever type of Landing it is out of Those three you know you you expect the The the the lower risk asset to survive But what you don't right you expect you Would expect meta or alphabet or apple You would or Microsoft right you would Expect those to survive because you know They have a healthy balance sheet so You're not really that concerned okay Now could you say the same thing about a Random company that only started up a Couple years ago and has not had the Time to build up a healthy balance sheet Can you say the same thing about that Company and the problem is that we can't But as investors that are seeking out Risk if you want to put your money

Somewhere if you're seeking out yield if You want to find a home for it what a Lot of people do is they go to the lower Risk asset during quantitative Tightening and during a late business Business cycle environment because two Reasons first of all investors want to Take risks right and they want to enjoy On the upside second of all they want to Minimize their downside risk if there is A hard Landing right because if there's A hard Landing everything gets rinsed But at least the the lower risk stuff Won't get rinsed as bad and it'll Probably be pretty quick to recover so That's where we are right we continue to Be in that type of environment where It's late business cycle and what I mean By late business cycle is I just mean That in terms of interest rates right Like this yellow line in terms of Interest rates like mid 2019 was late Business cycle because it was just Before the FED started to cut so that's What I mean by late business cycle is We're we're we're sort of coming up on On rate cuts at some point this year we Don't know exactly when that's going to Be and good chance right now that it's Not even going to be in March so if it's Not going to be in March then perhaps The next best time is May and that would imply that Bitcoin Dominance could continue to go up for a

While and when it comes to to bitcoin we Know that what it really likes to do What it really likes to do is it it Likes to to to sort of break risk it it Likes to break all Bitcoin pairs down During rallies right so if it goes up I Mean I drew it out here right but if it Goes up then it breaks all Bitcoin pairs Down or if it goes down then it breaks All Bitcoin pairs down but for a long Time it is just simply gone Up during this late business cycle Environment and a lot of these altcoins Simply bleed back to bitcoin and my Argument is that we will likely see that Shift on the other side of monetary Policy when we get back to looser rates Or looser monetary policy lower rates That that Trend will likely shift but Until that time I think the status quo Will remain unchanged and so net Liquidity I think is a great indicator To understand the current market cycle I Think people may go astray when they use It to tell them where USD valuations are Going to go when in reality it's much Better tool for better understanding Where the relative valuations of higher Risk assets are going to go compared to Lower risk assets and so that is what I Want to talk about today with net Liquidity hopefully you guys found that Useful again if you guys like the Content make sure you subscribe give the

Video a thumbs up and again check out The sale on into the cryptoverse premium At intothe cryptoverse Doom I'll see you Guys next time bye


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