New Focus After Turmoil in Financial Markets: Analysis of Crypto Market Trends

Recently, the financial markets have experienced a week of volatility, primarily driven by risk-averse sentiment triggered by tariff issues. However, as the market gradually digests this event-driven shock, a new equilibrium is beginning to form. Last Friday, global stock markets, especially the US stock market, closed higher, with changes in the volatility index of the S&P 500 reflecting this trend.

Last week, the VIX index reached a recent high, comparable to the financial turmoil caused by the pandemic in 2020, highlighting the unusual volatility in the market.

As short-term volatility calms, the focus of the cryptocurrency market shifts back to inflation and interest rate cut expectations. The expectation of interest rate cuts is particularly important as it may provide growth opportunities for risk assets led by Bitcoin.

The comparison of the global broad money supply (M2) and Bitcoin trends over the past 10 years shows a significant correlation between the two. The massive increase in Bitcoin is closely related to the growth of global M2, with this correlation even surpassing other financial indicators.

However, market participants generally focus their attention on the Federal Reserve's interest rate cut path, while overlooking another equally important indicator - the size of central bank assets. This indicator reflects the domestic liquidity situation and is closely related to the fluctuations of Bitcoin.

Historical data shows that changes in the central bank's asset scale closely correspond with the rise and fall cycles of Bitcoin, almost throughout every major increase in Bitcoin, corresponding to a four-year cycle. This correlation is reflected in the bull market of 2020-2021, the bear market of 2022, the recovery in early 2022-2023, and the surge in the fourth quarter of 2023.

It is worth noting that the central bank's asset scale began to decline after September 2024 and hit bottom at the end of the year, currently reaching a high point of the past year. Generally, changes in central bank liquidity often precede significant fluctuations in the Bitcoin and cryptocurrency markets.

Interestingly, during the Bitcoin bull market in 2017, the Federal Reserve did not adopt an accommodative policy; instead, it raised interest rates three times throughout the year and implemented quantitative tightening. However, risk assets led by Bitcoin still performed optimistically, largely thanks to the central bank's asset size hitting a new high that year.

From a broader perspective, there is also a certain correlation between the total assets of the central bank and the S&P 500. Based on data from 2015 to 2024, the annual correlation coefficient between the two is approximately 0.32.

In summary, in addition to paying attention to the monetary policy of the United States, investors also need to closely monitor changes in domestic financial data. Recent news has indicated that "monetary policy tools such as reserve requirement ratio cuts and interest rate cuts have ample room for adjustment and can be implemented at any time," which is worth our continued tracking.

By January 2025, the total deposits in our country will amount to 42.3 trillion USD, compared to approximately 17.93 trillion USD in the United States. This data suggests that our country may have greater leeway in financial policy. If domestic liquidity improves, it could bring new market opportunities.

Of course, whether the improvement in capital liquidity can directly benefit the cryptocurrency market remains to be seen, considering some existing policy restrictions. However, recent policy trends in Hong Kong have shown some positive signs, and compared to a few years ago, the regulatory environment is gradually improving.

The market environment is constantly changing, with opportunities and challenges coexisting. Investors need to remain vigilant and decisively seize opportunities when market trends become clear, in order to embrace a potential new growth cycle.