New Balance and Prospects of Crypto Assets after Global Financial Market Fluctuation

After a week of market turmoil caused by tariff friction, the financial markets found some relief over the weekend. However, whether this calm can be sustained remains uncertain. The tariff issue, as a sudden event, has led to capital seeking safety and emotional fluctuations, triggering significant market fluctuations.

When the market fully recognizes the fundamental changes brought by tariffs and risk-averse sentiment, the financial market is expected to find a new balance point. This also explains why global stock markets, especially the US stock market, closed higher last Friday, ending a week of Fluctuation. We can clearly see this trend from the changes in the volatility index of the S&P 500.

Last week, the VIX index reached a recent high, comparable to the financial turmoil caused by the pandemic in 2020, reflecting that the market has experienced rare and significant fluctuations.

As this wave of intense Fluctuation comes to a pause, the trend of the Crypto Assets market will refocus on factors such as inflation and interest rate cuts. The expectation of interest rate cuts will bring growth momentum to risk assets represented by Bitcoin.

By comparing the global broad money supply (M2) over the past 10 years with Bitcoin's performance, we can clearly see the high correlation between the two. The significant increase in Bitcoin over the past 10 years is built on the substantial growth of global M2, and this correlation even surpasses other financial indicators.

However, current participants in the Crypto Assets market seem to be overly focused on the Federal Reserve's interest rate cut path, while neglecting another important indicator worth paying attention to - the scale of the People's Bank of China assets. This indicator reflects the liquidity condition of Chinese currency and is closely related to the fluctuations of Bitcoin.

By analyzing the comparison chart of Bitcoin's price increase over the past three cycles and the growth of the People's Bank of China's assets, we can find that this correlation almost runs through every major rise of Bitcoin and coincides with the four-year cycle.

The liquidity changes of the People's Bank of China played an important role in the 2020-2021 Crypto Assets bull market, the 2022 bear market, the recovery in early 2022-2023, the surge in the fourth quarter of 2023, and the pullback in the second to third quarters of 2024. A few months before the 2024 U.S. presidential election, the liquidity of the People's Bank of China turned positive again, bringing about a wave of "election bull market."

It is worth noting that the asset scale of the People's Bank of China began to decline after September 2024 and bottomed out 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 the liquidity of the People's Bank of China typically precede significant fluctuations in the Bitcoin and Crypto Assets markets.

Interestingly, during the 2017 Bitcoin bull market, the Federal Reserve was not one of the "money printing" parties; instead, it raised interest rates three times throughout the year and implemented quantitative tightening. However, risk assets led by Bitcoin still performed very optimistically in 2017, largely due to the fact that the central bank of China reached a new high in asset scale that year.

Even from the perspective of the Standard & Poor's 500 index's increase, there is a certain correlation with the liquidity of the People's Bank of China. Historical data shows that the annual correlation coefficient between the total assets of the People's Bank of China and the Standard & Poor's 500 index is about 0.32 (based on data from 2015 to 2024).

Of course, this correlation is partly due to the overlapping time window between the quarterly monetary policy report of the People's Bank of China and the Federal Reserve's interest rate meetings, which amplifies the correlation in the short term.

In summary, we need to closely monitor not only the changes in the monetary policy of the United States but also the fluctuations in China's financial data. Recently, there have been reports stating: "There is ample room for adjustment in monetary policy tools such as reserve requirement ratio cuts and interest rate cuts, which can be implemented at any time." We need to continuously track this change.

It is noteworthy that, in terms of asset scale, as of January 2025, China's total deposits amount to 42.3 trillion dollars, while the United States' total deposits are approximately 17.93 trillion dollars. From the perspective of deposit scale, there are more financial possibilities in China, and if liquidity improves, it may bring about new changes.

Of course, another issue that needs to be explored is whether, even if the liquidity of funds improves, it can flow into the Crypto Assets market, as there are still certain restrictions. However, Hong Kong has already given positive signals; the situation in terms of the tightness and convenience of policies is different from a few years ago.

Overall, market opportunities always coexist with risks. While paying attention to global economic indicators, we also need to stay vigilant, grasp the pulse of the market, and be bold in seizing opportunities when they arise to maximize investment returns.