Analysis of Financial Market Fluctuations and the Prospects of Crypto Assets

Last weekend, after a week of turmoil caused by tariff frictions, the market finally welcomed a brief respite. However, whether this calm can be sustained remains uncertain. The tariff issue, as a sudden event, has led to capital risk aversion and emotional fluctuations, significantly increasing market volatility.

Once the market adapts to the fundamental changes brought by tariffs and releases risk-averse sentiment, financial markets can find a new balance. This also explains why global stock markets, especially U.S. stocks, closed higher last Friday, ending a week of fluctuations. This can be seen from the changes in the S&P 500 volatility index.

Last week, the VIX index reached a recent high, comparable to only the extreme fluctuations caused by last year's interest rate hikes by the Bank of Japan and the financial turmoil triggered by the pandemic in 2020. This is also the reason for such significant market fluctuations over the past week.

As this round of significant fluctuation temporarily settles, the focus affecting the Crypto Assets market's trend has returned to the two age-old topics of "inflation" and "interest rate cuts." After all, only interest rate cuts can lead to a massive influx of funds, providing growth momentum for risk assets led by Bitcoin.

By comparing the global broad money supply (M2) over the past 10 years with the trends of Bitcoin, we can clearly see this correlation. The significant increase in Bitcoin over the past 10 years is built upon the explosive growth of global M2, and this correlation trend far exceeds that of other financial data.

This also explains why Bitcoin always experiences fluctuations whenever the United States publishes inflation or interest rate related data, as this ultimately affects whether new funds flow into the Crypto Assets sector.

However, the current cryptocurrency market seems to be overly focused on the Federal Reserve's interest rate cut path, while neglecting another noteworthy indicator - the central bank's asset scale. This indicator reflects the current liquidity situation of our country's currency.

In fact, the scale of central bank assets is closely related to the fluctuation of Bitcoin. Data from the past three cycles shows that this correlation has almost run through every major rise of Bitcoin and is basically in line with the four-year cycle.

The liquidity of the central bank played an important role during the crypto assets 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 third quarter of 2024.

It is worth noting that the scale of central bank assets began to decline after September 2024, reaching a bottom and rebounding by the end of 2024, and has now risen to a high point over the past year. From the perspective of data correlation, changes in central bank liquidity usually precede significant fluctuations in the Bitcoin and Crypto Assets markets.

Interestingly, during the 2017 Bitcoin bull market, the Federal Reserve was not on the "easing" side, but instead 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 size reached a new high that year.

Even from the perspective of the S&P 500's fluctuations, there is a certain correlation with the central bank's 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 2015-2024).

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 not only need to closely monitor the monetary policy of the United States but also pay attention to the changes in domestic financial data. A week ago, it was reported: "Tools such as reserve requirement ratio cuts and interest rate cuts have ample room for adjustment and can be implemented at any time," and we need to continuously track this change.

It is worth noting that 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. In terms of deposit scale, our country has more financial possibilities. If liquidity improves, it may bring about certain changes.

Of course, another question worth discussing is whether funds can flow into the Crypto Assets market even if liquidity improves, as there are still some restrictions. However, Hong Kong has provided an answer; from the perspective of policy looseness and convenience, the situation is already different from a few years ago.

Overall, when the market environment changes, opportunities will arise. What we need to do is not only wait but also be bold enough to seize the opportunity when it comes and embrace new challenges.