Market Breathes After Tariff Fluctuation, Future Trends Focus on Inflation and Liquidity

After a week of tariff frictions, the financial markets gained a brief respite over the weekend. However, it remains uncertain whether this calm can be sustained. The tariff issue, as an unexpected event, has triggered capital flight and emotional Fluctuation, leading to severe turbulence in the market.

Once the market clarifies the fundamental changes brought about by tariffs and releases risk-averse sentiment, the financial system will seek a new equilibrium. This explains why global stock markets, especially the US stock market, closed higher last Friday, ending a week of turbulence. This is evident from the changes in the S&P 500 volatility index.

Last week, the VIX index hit a recent high, comparable to the financial turmoil caused by the pandemic in 2020. This also explains the reason for such significant fluctuations in the market over the past week, after all, such severe fluctuations are quite rare.

As the huge Fluctuation comes to a pause, the focus influencing the cryptocurrency market trends has returned to "inflation" and "interest rate cuts". Only interest rate cuts can bring abundant liquidity, providing growth momentum for risk assets led by Bitcoin.

Comparing the global broad money supply (M2) over the past 10 years with the trend of Bitcoin, one can clearly see the high correlation between the two. The massive increase in Bitcoin over the past 10 years is built on the foundation of the explosive growth of global M2, and this correlation far exceeds that of other financial indicators.

This also explains why Bitcoin always experiences fluctuations whenever data related to inflation or interest rate cuts is released, as this ultimately affects whether new funds flow into the cryptocurrency space.

However, the market currently seems too focused on the Fed's rate cut path, while neglecting another important indicator – the central bank's asset size. It reflects the liquidity situation of domestic currency and is equally closely related to the fluctuation of Bitcoin.

Looking at the fluctuations in Bitcoin's growth over the past three cycles and the changes in central bank asset sizes, one can observe that this correlation runs through every significant rise in Bitcoin, corresponding precisely with the four-year cycle.

The liquidity of the central bank played an important role in the cryptocurrency bull market of 2020-2021, the bear market of 2022, the recovery from the end of 2022 to the beginning of 2023, the surge in the fourth quarter of 2023, and the pullback from the second to the third quarter of 2024.

It is worth noting that after September 2024, the central bank's asset scale began to decline and rebounded to a low point by the end of the year, currently rising to a high point of the past year. From the perspective of data correlation, changes in central bank liquidity usually precede significant fluctuations in the Bitcoin and cryptocurrency markets.

Interestingly, during the 2017 Bitcoin bull market, the Federal Reserve was not the "money printer"; instead, it raised interest rates three times throughout the year and implemented quantitative tightening. However, risk assets led by Bitcoin still performed very optimistically in 2017, as the central bank's asset scale reached a new high that year.

Even from the perspective of the S&P 500's gains, there is a certain correlation with central bank liquidity. Historical data shows that the correlation coefficient between the total assets of the central bank and the annual S&P 500 is approximately 0.32 (based on data from 2015 to 2024).

Of course, to some extent, this is also because the timing of the central bank's quarterly monetary policy report overlaps with the Federal Reserve's interest rate meeting, which amplifies the correlation in the short term.

In summary, we must not only closely monitor the monetary policy of the United States but also pay attention to the changes in domestic financial data. Recent news has indicated that "monetary policy tools such as reserve requirement ratio cuts and interest rate cuts have sufficient room for adjustment and can be implemented at any time." We need to continuously track this change.

It is worth mentioning that, in terms of asset scale, as of January 2025, the total deposits in our country amount to 42.3 trillion USD, while the total deposits in the United States are approximately 17.93 trillion USD. From the perspective of deposit scale, there are more financial possibilities domestically, and if Liquidity improves, new changes may emerge.

Of course, another issue that needs to be explored is whether funds can truly flow into the cryptocurrency market even if liquidity improves, as there are still some restrictions. However, Hong Kong has already given positive signals; in terms of policy looseness and convenience, the situation is different from a few years ago.

Finally, as a famous saying goes, "When the wind comes, even pigs can fly." Taking advantage of the situation beats rowing upstream. What we need to do, besides waiting, is to dare to climb up when the wind rises and soar against the wind.