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I want to write about something I've been contemplating repeatedly: how Bitcoin might perform amidst an unprecedented shift in its major capital flow patterns since its inception. I believe that once the deleveraging process ends, Bitcoin will present an excellent trading opportunity. In this article, I will elaborate on my thoughts in detail.
What Is the Key Driver of Bitcoin Prices?
I will draw on Michael Howell's research on the historical drivers of Bitcoin price movements and use these insights to further understand how the intertwined factors might evolve in the near future.
Viewpoint: Global Liquidity Is the Key Driver of Bitcoin Prices
As shown in the graph above, Bitcoin prices are driven by these factors:
Overall investor preference for high-risk, high-beta assets
Correlation between Bitcoin and gold
Global liquidity
Since 2021, I have understood the simple framework of risk appetite, gold performance, and global liquidity by using the ratio of fiscal deficit to gross domestic product (GDP) as a quick indicator to gain insight into the fiscal stimulus factors that have dominated global markets since 2021.
Mechanically speaking, a higher ratio of fiscal deficit to GDP leads to increased inflation and rising nominal GDP, which in turn boosts corporate revenues since revenue is a nominal indicator. For firms that can enjoy economies of scale, this is a positive for their earnings growth.
To a large extent, monetary policy has taken a back seat to fiscal stimulus, which has been the primary driver of risk asset activity. As shown in this chart frequently updated by George Robertson, compared to fiscal stimulus, monetary stimulus in the United States has been relatively weak, so I will set aside monetary stimulus factors in this discussion.
Viewpoint: Global Liquidity Is the Key Driver of Bitcoin Prices
From the chart below of major Western developed economies, we can see that the ratio of the US fiscal deficit to GDP is significantly higher than that of other countries.
Viewpoint: Global Liquidity Is the Key Driver of Bitcoin Prices
Due to the enormous fiscal deficit in the United States, revenue growth has dominated, making the US stock market outperform other economies:
Viewpoint: Global Liquidity Is the Key Driver of Bitcoin Prices
The US stock market has been the primary marginal driver of risk asset growth, wealth effects, and global liquidity, thus becoming a magnet for global capital as capital is treated best in the United States. This dynamic of capital flowing into the US, combined with a massive trade deficit, has resulted in the US exchanging goods for foreign-held dollar foreign exchange, which is then reinvested in dollar-denominated assets such as US Treasuries and the "FAANG" tech stocks. This has made the US the primary driver of all risk appetites globally:
Viewpoint: Global Liquidity Is the Key Driver of Bitcoin Prices
Now, let's return to Michael Howell's research mentioned earlier. Over the past decade, risk appetite and global liquidity have been primarily driven by the United States, and since the COVID-19 pandemic, this trend has accelerated due to the US's extremely large fiscal deficit compared to other countries.
As a result, even though Bitcoin is a global liquidity asset (not just tied to the US), it exhibits a positive correlation with the US stock market, and this correlation has strengthened since 2021:
Viewpoint: Global Liquidity Is the Key Driver of Bitcoin Prices
Now, I believe that the correlation between Bitcoin and the US stock market is spurious. When I use the term "spurious correlation," I do so in a statistical sense, meaning that I believe there is a third causal variable that is not revealed in the correlation analysis that is the true driver. I believe this factor is global liquidity, which, as we've discussed, has been dominated by the US for nearly a decade.
When we delve into statistical significance, we must also determine causality, not just positive correlation. Fortunately, Michael Howell has also done some excellent work in this area, using the Granger Causality test to determine the causality between global liquidity and Bitcoin:
Viewpoint: Global Liquidity Is the Key Driver of Bitcoin Prices
What conclusions can we draw from this as a baseline for our further analysis?
Bitcoin prices are primarily driven by global liquidity, and since the US has been the dominant factor in the growth of global liquidity, a spurious correlation has emerged between Bitcoin and the US stock market.
Over the past month, as we've speculated about Trump's trade policy objectives and the reorganization of global capital and commodity flows, several key viewpoints have emerged. I'll summarize them as follows:
The Trump administration hopes to reduce the trade deficit with other countries. Mechanically, this means fewer dollars will flow to foreign countries, where they would have been reinvested in US assets. If this is to be avoided, the trade deficit cannot be reduced.
The Trump administration believes that foreign currencies are artificially depressed and the dollar is artificially overvalued, and hopes to rebalance this situation. In short, a weaker dollar and stronger foreign currencies will lead to higher interest rates in other countries, prompting capital to flow back to those countries to capture these rate gains, which will appear better from a foreign exchange-adjusted perspective and also promote domestic stock markets.
Trump's "shoot first, ask questions later" approach in trade negotiations is prompting other countries around the world to shed their meager fiscal deficit status relative to the US and invest in defense, infrastructure, and overall protectionist government investment to make themselves more self-sustaining. Regardless of whether tariff negotiations ease (such as those with China), I believe the "genie is out of the bottle," and countries will continue this effort and will not easily turn back.
Trump wants other countries to increase their defense spending as a percentage of GDP, as the US has borne a significant share of these costs. This will also increase fiscal deficits.
I'll set aside my personal views on these viewpoints for now, as many others have already expressed their opinions, and I will simply focus on the potential implications if these viewpoints develop logically:
Capital will leave dollar-denominated assets and flow back to home countries. This means that the US stock market will underperform the rest of the world, bond yields will rise, and the dollar will depreciate.
In the countries where this capital flows back to, fiscal deficits will no longer be constrained, and other economies will begin to spend and print money recklessly to fill the growing fiscal deficits.
As the US continues to shift from being a global capital partner to a protectionist role, holders of dollar assets will have to raise risk premiums associated with these previously considered high-quality assets and must set wider safety margins for these assets. When this happens, it will lead to rising bond yields and foreign central banks will be interested in diversifying their balance sheets away from just US Treasuries and towards other neutral assets such as gold. Similarly, foreign sovereign wealth funds and pension funds may also make such diversification adjustments to their portfolios.
The counterargument to these viewpoints is that the US is the center of innovation and technology-driven growth, and no country can replace this position. Europe is too bureaucratic and socialist to develop capitalism like the US. I understand this viewpoint, and it may mean that this will not be a trend lasting many years but rather a medium-term trend.
Returning to the title of this article, the first round of trading is to sell globally overallocated dollar assets and avoid the ongoing deleveraging process. Since these assets are heavily overallocated globally, the deleveraging process can become a mess when large money managers and more speculative participants with tighter stop-loss settings, such as multi-strategy hedge funds, hit their risk limits. When this happens, it results in margin call days where massive assets need to be sold to raise cash. Currently, the key is to survive this process and retain sufficient cash reserves.
However, as the deleveraging process stabilizes, the next round of trading begins. Diversify portfolios to include foreign stocks, foreign bonds, gold, commodities, and even Bitcoin.
We are already starting to see this dynamic take shape during market rotations and days without margin calls. The US Dollar Index (DXY) is falling, the US stock market is underperforming other regions, gold prices are surging, and Bitcoin has surprisingly held up well relative to traditional US tech stocks.
I believe that as this unfolds, the marginal growth in global liquidity will shift to a state that is completely opposite to what we've been accustomed to in the past. The rest of the world will take up the mantle of increasing global liquidity and risk appetite.
When I consider the risks of this diversification in the context of a global trade war, I worry about the tail risks of investing deeply in risk assets in other countries due to potential negative headlines about tariffs that could affect these assets. Therefore, during this transition, gold and Bitcoin have become my top choices for global diversification.
Gold is currently performing extremely strongly, setting new all-time highs every day. However, while Bitcoin has surprisingly held up well throughout this shift, its beta correlation with risk appetite has so far limited its gains, failing to keep up with gold's outstanding performance.
So, as we move towards a global capital rebalancing, I believe the next trading opportunity after this round of trading lies in Bitcoin.
When I compare this framework with Howell's correlation research, I find that they align well:
The US stock market is not affected by global liquidity but only by liquidity measured by fiscal stimulus, along with some capital inflows. However, Bitcoin is a global asset that reflects the broader state of global liquidity.
As this viewpoint gains acceptance and risk allocators continue to rebalance, I believe risk appetite will be driven by the rest of the world, not the US.
Gold couldn't be performing better, and Bitcoin's partial correlation with gold also aligns with our expectations.
Taking all these factors into account, for the first time in my life, I see the potential for Bitcoin to decouple from US tech stocks. I know this is a high-risk idea and often marks a local high in Bitcoin prices. But the difference is that this capital flow could see significant and lasting changes.
So, for a risk-seeking macro trader like me, Bitcoin feels like the most worthwhile trade to participate in after this round of trading. You can't impose tariffs on Bitcoin, it doesn't care which country's borders it resides within, it provides high-beta returns to portfolios without the tail risks associated with US tech stocks, I don't need to judge whether the EU can solve its own problems, and it provides exposure to global liquidity, not just US liquidity.
This market setup is Bitcoin's opportunity. Once the dust settles from deleveraging, it will be the first to sprint and accelerate forward.
I want to write about something I've been contemplating repeatedly: how Bitcoin might perform amidst an unprecedented shift in its major capital flow patterns since its inception. I believe that once the deleveraging process ends, Bitcoin will present an excellent trading opportunity. In this article, I will elaborate on my thoughts in detail.
What Is the Key Driver of Bitcoin Prices?
I will draw on Michael Howell's research on the historical drivers of Bitcoin price movements and use these insights to further understand how the intertwined factors might evolve in the near future.
Viewpoint: Global Liquidity Is the Key Driver of Bitcoin Prices
As shown in the graph above, Bitcoin prices are driven by these factors:
Overall investor preference for high-risk, high-beta assets
Correlation between Bitcoin and gold
Global liquidity
Since 2021, I have understood the simple framework of risk appetite, gold performance, and global liquidity by using the ratio of fiscal deficit to gross domestic product (GDP) as a quick indicator to gain insight into the fiscal stimulus factors that have dominated global markets since 2021.
Mechanically speaking, a higher ratio of fiscal deficit to GDP leads to increased inflation and rising nominal GDP, which in turn boosts corporate revenues since revenue is a nominal indicator. For firms that can enjoy economies of scale, this is a positive for their earnings growth.
To a large extent, monetary policy has taken a back seat to fiscal stimulus, which has been the primary driver of risk asset activity. As shown in this chart frequently updated by George Robertson, compared to fiscal stimulus, monetary stimulus in the United States has been relatively weak, so I will set aside monetary stimulus factors in this discussion.
Viewpoint: Global Liquidity Is the Key Driver of Bitcoin Prices
From the chart below of major Western developed economies, we can see that the ratio of the US fiscal deficit to GDP is significantly higher than that of other countries.
Viewpoint: Global Liquidity Is the Key Driver of Bitcoin Prices
Due to the enormous fiscal deficit in the United States, revenue growth has dominated, making the US stock market outperform other economies:
Viewpoint: Global Liquidity Is the Key Driver of Bitcoin Prices
The US stock market has been the primary marginal driver of risk asset growth, wealth effects, and global liquidity, thus becoming a magnet for global capital as capital is treated best in the United States. This dynamic of capital flowing into the US, combined with a massive trade deficit, has resulted in the US exchanging goods for foreign-held dollar foreign exchange, which is then reinvested in dollar-denominated assets such as US Treasuries and the "FAANG" tech stocks. This has made the US the primary driver of all risk appetites globally:
Viewpoint: Global Liquidity Is the Key Driver of Bitcoin Prices
Now, let's return to Michael Howell's research mentioned earlier. Over the past decade, risk appetite and global liquidity have been primarily driven by the United States, and since the COVID-19 pandemic, this trend has accelerated due to the US's extremely large fiscal deficit compared to other countries.
As a result, even though Bitcoin is a global liquidity asset (not just tied to the US), it exhibits a positive correlation with the US stock market, and this correlation has strengthened since 2021:
Viewpoint: Global Liquidity Is the Key Driver of Bitcoin Prices
Now, I believe that the correlation between Bitcoin and the US stock market is spurious. When I use the term "spurious correlation," I do so in a statistical sense, meaning that I believe there is a third causal variable that is not revealed in the correlation analysis that is the true driver. I believe this factor is global liquidity, which, as we've discussed, has been dominated by the US for nearly a decade.
When we delve into statistical significance, we must also determine causality, not just positive correlation. Fortunately, Michael Howell has also done some excellent work in this area, using the Granger Causality test to determine the causality between global liquidity and Bitcoin:
Viewpoint: Global Liquidity Is the Key Driver of Bitcoin Prices
What conclusions can we draw from this as a baseline for our further analysis?
Bitcoin prices are primarily driven by global liquidity, and since the US has been the dominant factor in the growth of global liquidity, a spurious correlation has emerged between Bitcoin and the US stock market.
Over the past month, as we've speculated about Trump's trade policy objectives and the reorganization of global capital and commodity flows, several key viewpoints have emerged. I'll summarize them as follows:
The Trump administration hopes to reduce the trade deficit with other countries. Mechanically, this means fewer dollars will flow to foreign countries, where they would have been reinvested in US assets. If this is to be avoided, the trade deficit cannot be reduced.
The Trump administration believes that foreign currencies are artificially depressed and the dollar is artificially overvalued, and hopes to rebalance this situation. In short, a weaker dollar and stronger foreign currencies will lead to higher interest rates in other countries, prompting capital to flow back to those countries to capture these rate gains, which will appear better from a foreign exchange-adjusted perspective and also promote domestic stock markets.
Trump's "shoot first, ask questions later" approach in trade negotiations is prompting other countries around the world to shed their meager fiscal deficit status relative to the US and invest in defense, infrastructure, and overall protectionist government investment to make themselves more self-sustaining. Regardless of whether tariff negotiations ease (such as those with China), I believe the "genie is out of the bottle," and countries will continue this effort and will not easily turn back.
Trump wants other countries to increase their defense spending as a percentage of GDP, as the US has borne a significant share of these costs. This will also increase fiscal deficits.
I'll set aside my personal views on these viewpoints for now, as many others have already expressed their opinions, and I will simply focus on the potential implications if these viewpoints develop logically:
Capital will leave dollar-denominated assets and flow back to home countries. This means that the US stock market will underperform the rest of the world, bond yields will rise, and the dollar will depreciate.
In the countries where this capital flows back to, fiscal deficits will no longer be constrained, and other economies will begin to spend and print money recklessly to fill the growing fiscal deficits.
As the US continues to shift from being a global capital partner to a protectionist role, holders of dollar assets will have to raise risk premiums associated with these previously considered high-quality assets and must set wider safety margins for these assets. When this happens, it will lead to rising bond yields and foreign central banks will be interested in diversifying their balance sheets away from just US Treasuries and towards other neutral assets such as gold. Similarly, foreign sovereign wealth funds and pension funds may also make such diversification adjustments to their portfolios.
The counterargument to these viewpoints is that the US is the center of innovation and technology-driven growth, and no country can replace this position. Europe is too bureaucratic and socialist to develop capitalism like the US. I understand this viewpoint, and it may mean that this will not be a trend lasting many years but rather a medium-term trend.
Returning to the title of this article, the first round of trading is to sell globally overallocated dollar assets and avoid the ongoing deleveraging process. Since these assets are heavily overallocated globally, the deleveraging process can become a mess when large money managers and more speculative participants with tighter stop-loss settings, such as multi-strategy hedge funds, hit their risk limits. When this happens, it results in margin call days where massive assets need to be sold to raise cash. Currently, the key is to survive this process and retain sufficient cash reserves.
However, as the deleveraging process stabilizes, the next round of trading begins. Diversify portfolios to include foreign stocks, foreign bonds, gold, commodities, and even Bitcoin.
We are already starting to see this dynamic take shape during market rotations and days without margin calls. The US Dollar Index (DXY) is falling, the US stock market is underperforming other regions, gold prices are surging, and Bitcoin has surprisingly held up well relative to traditional US tech stocks.
I believe that as this unfolds, the marginal growth in global liquidity will shift to a state that is completely opposite to what we've been accustomed to in the past. The rest of the world will take up the mantle of increasing global liquidity and risk appetite.
When I consider the risks of this diversification in the context of a global trade war, I worry about the tail risks of investing deeply in risk assets in other countries due to potential negative headlines about tariffs that could affect these assets. Therefore, during this transition, gold and Bitcoin have become my top choices for global diversification.
Gold is currently performing extremely strongly, setting new all-time highs every day. However, while Bitcoin has surprisingly held up well throughout this shift, its beta correlation with risk appetite has so far limited its gains, failing to keep up with gold's outstanding performance.
So, as we move towards a global capital rebalancing, I believe the next trading opportunity after this round of trading lies in Bitcoin.
When I compare this framework with Howell's correlation research, I find that they align well:
The US stock market is not affected by global liquidity but only by liquidity measured by fiscal stimulus, along with some capital inflows. However, Bitcoin is a global asset that reflects the broader state of global liquidity.
As this viewpoint gains acceptance and risk allocators continue to rebalance, I believe risk appetite will be driven by the rest of the world, not the US.
Gold couldn't be performing better, and Bitcoin's partial correlation with gold also aligns with our expectations.
Taking all these factors into account, for the first time in my life, I see the potential for Bitcoin to decouple from US tech stocks. I know this is a high-risk idea and often marks a local high in Bitcoin prices. But the difference is that this capital flow could see significant and lasting changes.
So, for a risk-seeking macro trader like me, Bitcoin feels like the most worthwhile trade to participate in after this round of trading. You can't impose tariffs on Bitcoin, it doesn't care which country's borders it resides within, it provides high-beta returns to portfolios without the tail risks associated with US tech stocks, I don't need to judge whether the EU can solve its own problems, and it provides exposure to global liquidity, not just US liquidity.
This market setup is Bitcoin's opportunity. Once the dust settles from deleveraging, it will be the first to sprint and accelerate forward.
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