Bitcoin: The Liquidity Paradox transcript

Hey everyone, and thanks for jumping back into the cryptoverse. Today, we're going to talk about Bitcoin and the liquidity paradox. If you guys like the content, make sure you subscribe to the channel, give the video a thumbs up, and also check out the sale on into the cryptoverse premium at intothecryptoverse.com. I've mentioned this uh before, but I wanted to mention it again. I am going to New Zealand uh in just about a week.

So, I'm actually speaking at a tech conference in New Zealand. I've always wanted to go to New Zealand. It's been the like the uh the top of the list for me for forever, basically. I've always wanted to go there. But, I'm actually going to go there uh next week. And I'll be there, you know, for about a week or so. And if any of you guys are from New Zealand, which I know some of you are because I looked at my uh the audience statistics.

If any of you guys are in New Zealand, it'd be great to see you. Um I will be speaking at the tech summit um in Christchurch, New Zealand on September 16th. And then on September 17th, if you go up here to the program and you click on post-tech summit workshops, I'm actually doing a workshop the day the day after on the 17th uh where we're going through sort of the Bitcoin cycle playbook. So, if any of you guys are already in New Zealand, it'd be really cool to see you guys there.

Um but, I hope to see some of you guys at that conference. Now, in this video, what I'd like to do is talk about this liquidity paradox, which is not really a paradox, but it it's uh it comes up time and time again throughout this year and even last year. And I want to showcase why Bitcoin has actually responded appropriately to liquidity conditions and not and it instead of what people think and that was that Bitcoin is supposed to follow M2.

All right, so here's the thing. The global money supply M2 is at all-time highs. Okay, now this one that we're showing right here is just in the United States, but if you go and look at it for the entire world, it's the same thing, right? You can go to international and and just see that the money supply for basically everywhere, especially if you add it all up, is at all-time highs. So, M2 all-time highs. The stock market all-time highs.

Now, technically it's not an all-time high right this minute, right? But it was like three to four weeks ago. So, cut me some slack on that. All right, we're basically we're in the neighborhood of all-time highs. So, if you have the money supply at all-time highs and you have the stock market at all-time highs, and what you're told by a lot, you know, what a lot of people say is that Bitcoin just follows the money supply.

How does it make sense that Bitcoin is not at all-time highs? And the reason for this is the flow, right? It's the rate of change. If you're in mathematics, you might even be interested in the second derivative. So, what a lot of people are looking at and it with Bitcoin is that they were thinking, "Okay, if the money supply goes up, then Bitcoin will go up." And we can actually look we can actually overlay Bitcoin on here rather than rather than just the stock market.

So, if you if the money supply goes up, then Bitcoin should go up. But the money supply is at all-time highs and it's well beyond where where it was back in 2022, but yet Bitcoin isn't really following to all-time highs. So, So, why is the question? Because the stock market had no problem following. So, why is Bitcoin different? Well, we actually know the reason. And the reason was actually showcased to us in 2019. And I know a lot of you guys, when I talk about 2019, you're like, "Not this again." You know, if you guys had a Satoshi for every time I said 2019 over the last few years, you probably would have a full Bitcoin by now.

Okay? So, I understand. But, that's the the the best comparison we have for what we've experienced. Is that in 2019, so too was the money supply going up, and Bitcoin still ended up dropping, even though the stock market went to all-time highs. But, I would argue that liquidity is more than it's more than just what is the money supply. All right? Now, I've shown this chart many times. And I'm going to show it again. And we're going to go through the same thing again.

But, it's global net liquidity. So, there's M2, which is what everyone and their mom talks about. But, there's global net liquidity, which in this case, we're trying to represent net liquidity, and we're defining it as the central bank balance sheet, right? The the sum of at least a lot of major economies in the world. So, in this case, we're summing up the balance sheet of the Fed, the Bank of Japan, Bank of China, UK, ECB, and we're subtracting out the reverse repo and the TGA.

All right? So, by aggregating all of them into a single metric, it helps us to gauge whether conditions are truly supportive or if they're restrictive. So, on one hand, you have people saying, "Well, the money supply is at all-time highs." And and and and that's what made a lot of people bullish on Bitcoin going into 2026. They're like, "Well, M2 is at all-time highs." But, so what, right? I mean, M2 was at all-time highs in 2014, and it was at all-time highs in 2018, and it was at all-time highs in 2022.

Even going even as late as March, it didn't stop Bitcoin from going down. So, why is this the case? Well, it's because Bitcoin is sensitive to liquidity. And if you look at global net liquidity, it's nowhere near the highs in 2021 and 2022, right? I mean, look at it. Look how far down it is. In Back then, in 2022, global net liquidity, or the approximation of it in this case, was around 30 trillion. But, we're still sitting at around 25 trillion.

So, that's $5 trillion less aggregated across those central banks. Now, remember, the balance sheet of central banks is also, when we're aggregating it and summing it up, is going to be dependent on the dollar, because we have to convert the denominator, right? We have to convert it into the same currency. It doesn't make sense to add up US dollars to euros. We have to convert that over. So, if the dollar is going up, then liquidity is going down.

And if liquidity, if the dollar is going down, then typically liquidity is going up, because the purchasing power of the other fiat currencies that we're summing up is higher, because we're measuring it in US dollars, okay? So, when you look at a chart like this, and if you overlay Bitcoin instead of the stock market, right? So, if we overlay Bitcoin here, what you'll see is that there was also a time when Bitcoin stalled out and didn't do anything for a while, right?

Now, look at 2017 and then look at the bear market, and then you see how Bitcoin stalled out in 2019 and just kind of went down for a while. It didn't pick back up until there was a reason for global net liquidity to head back up very quickly. You see that? What did it head up in response to? The pandemic. But, it doesn't matter that it was a pandemic. It could have been anything. The point is there was a reason to print.

There was a reason for the central banks to add to their balance sheet. The problem for Bitcoin, that that it has been for many years now, is that the build-out in AI has led to very narrow leadership in the stock market. There's a lot of companies that are not doing well that make up the S&P 500, but there are the few that are the mega caps, Google, right? Microsoft, Amazon, um Apple, etc. Okay, Alphabet is what I should say for that, but for for Google.

But, those are all doing great. And they're lifting the index up. But, because they're lifting the index up, there's not really a reason for the Fed to be too worried about things. So, what happens? Net liquidity continues to stay low. So, when you look at this and say, "Well, this has never happened before." It has. It happened in 2019 and 2020. This is just a much larger version of what we saw happen in 2019-2020. Bitcoin just had a 4-year cycle bull market that existed without within the entire within the entire confines of quantitative tightening.

In 2019, it existed within the confines of quantitative tightening. It's just that that cycle something interrupted it mid-cycle and allowed us to have a QT bull market and also a money printing QE bull market. But last cycle we only had a QT bull market and with high interest rates. Now people are getting spooked. The Fed's about to raise rates and we know Kevin Warsh is a fan of reducing the balance sheet of the Federal Reserve.

We'll see if he wants to do that or not, but we know he's a fan of it. So you have to ask yourself is this really is Bitcoin doing something different or is it doing what it's always done? And that is respond to the actual appropriate liquidity measure. So while a lot of people are so focused on the money supply and how many weeks we should lag it in order to find some type of correlation I think people really should be looking at global net liquidity and recognizing that Bitcoin or sorry that the central bank's balance sheet is nowhere near it was in 2021.

It's just been hanging out around 25 trillion for the last several years. So there's not really a paradox, is there? The paradox that people thinks exists, the only reason they think it's a paradox is because they think that Bitcoin responds to the total money supply, but that is not what Bitcoin is responding to in this case. Yes, if they print money asset prices can go up over long period of time, but Bitcoin is responding to one of the more important liquidity risk metric or one of the more important liquidity metrics and that is global net liquidity.

So you can see that when net liquidity stalls out like in 2018, 2019, 2020 Bitcoin also stalls out. Doesn't And And when I say stalls out I mean underperforms basically everything else. Basically it underperforms the market. Okay? That mean it can't go up. And then if you look at the last several years, you might say, "Well, hold on a second, Ben. Bitcoin went to new all-time highs." So what? Right? I mean, so what? It It If you look at its valuation against the S&P 500, it's been going down.

And it really it's it's it barely made new highs this cycle. And right now it's at the same valuation it was at in 2021 and also in early 2022. But guess what happened in early 2022? Global net liquidity started to drop. So, the reason why Bitcoin has been stuck in traffic on struggle street for the last 5 years, arguably, is because net liquidity remains low. And until there's a reason for this to really go up, you could still simply see Bitcoin underperform over a long period of time the stock market.

But, whenever we reach the point where there's a reason for this to change, that's when Bitcoin starts to outperform. There could be a scenario soon where this happens, right? We'll have to see. I I don't know for sure, but it's going to happen at some point, right? I mean, I don't think anyone's here under the illusion that that this won't continue to go up into the right over a long enough period of time. It probably will.

But a lot of people lost a lot of money betting that, you know, that that they were going to just really start printing like crazy and and there was going to be an alt season. But really, if you just look at this chart, you can see like why that hasn't happened. So, while the money supply is at all-time highs and the stock market is at all-time highs, Bitcoin is not. It's not because Bitcoin no longer has a you know, some type of relationship with with money or liquidity.

It's just that the relationship that people are focusing on, which is M2, is not the right one. Net liquidity in this case, I think, goes a lot further and it fully explains why Bitcoin topped on apathy. It explains why there was no rotation into altcoins. And it explains why the drawdown has been a lot slower. And it it hasn't gone uh nearly as deep as what you've previously seen, right? So, if you look at Bitcoin after from from peak to peak, like look at this cycle compared to the last three, right?

It's not nearly as bad. But, the reason, arguably, is because we topped on apathy rather than euphoria. And we topped on apathy rather than euphoria because net liquidity remains low. And it has nothing to do with the money supply. So, the paradox is resolved. The answer was always there and it's been there since 2019. Those are my views. If you guys like the content, subscribe to the channel, give the video a thumbs up.

Hopefully, I'll see see you guys in New Zealand. Uh if you're in that part of the world, I again will be speaking on September 16th. If you want to go to that conference and or go to the workshop after on the next day, I will leave a link down in the description below and the pinned comment and I hope to see you guys uh at the conference. Thank you guys for tuning in. I'll see you next time. Bye.