Bitcoin is acting as a liquidity indicator for central bank balance sheets

Quick Take

• As the global world is facing extreme inflation, central banks are trying to reign in inflation by decreasing their balance sheets (quantitative tightening) and increasing interest rates.
• The blue line considers the central bank balance sheet of the US, Japan, UK, China, and Europe, which amounts to $760T. Down from $800T back in May 2022.
• The red line symbolizes the net liquidity, which equals the Fed’s total assets (Treasury + Reserve Repo).
• The orange line is the price of Bitcoin.
• Many narratives have been developed over the years for Bitcoin, one being an inflation hedge and another a liquidity hedge.
• As central banks have to increase their balance sheet due to being on a credit-based system, i.e., the need for perpetual growth, BTC moves on credit expansion on balance sheets, which is seen with its latest uptick in price. These movements are significant to witness.

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