Central banks liquidity is the money central banks around the world make available to grease the grooves of the financial system.
This kind of liquidity can take different forms depending on the period and the country. But the common theme across all major central banks is the lowering of key interest rates and the expansion of the central banks balance sheet. Those are the two most powerful mechanisms central bankers can use to support the market.
Now it makes sense to think that Bitcoin as a global asset must be affected by central banks providing (or taking away) liquidity to the system.
The question how is it affected and what are the current conditions.
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Central banks liquidity: headwind or tailwind for Bitcoin?
The takeaway
Bitcoin hasn’t been a major asset for long enough for us to be able to tell with any certainty how it is supposed to behave when central banks engage in important policy changes.
But given the most recent history the safe bet is to say that:
Looser monetary policies provide a tailwind to Bitcoin’s price action.
Tighter monetary policies provide a headwind to Bitcoin’s price action.
Neutral monetary policies allow for other factors to influence Bitcoin’s direction.
In aggregate the major central banks are still taking away liquidity from the market.
Only China is doing something really different than usual due to economic problems at home. But that’s unlikely to cancel the combined tightening of the Federal, the European Central Bank and the Bank of Japan.
For that reason we don’t think the conditions are there for Bitcoin to start another bull market.
The real trial will come when we observe the response of the major central banks to the upcoming recession.
Bitcoin needs liquidity (probably)
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