The bear market taught us the importance of liquidity. When the FED reduced liquidity, even the fancy crypto projects lost a significant portion of their value. Nowadays, we see that liquidity is starting to increase. Cryptocurrency prices also react positively to this situation.
Liquidity is generally monitored through the size of central bank balance sheets. On the other hand, expenditures of public institutions and open market operations of central banks also affect liquidity.
I use the FED Net Liquidity Indicator variable from Trandingview in my analysis.
Net Liquidity = Fed Balance Sheet - ( TGA + Reverse REPO)
This variable also includes treasury expenditures and money market transactions. Therefore, it represents liquidity better. It is necessary to consider the liquidity created by other significant economies to get a broader liquidity picture. Again, Net Liquidity in the USA explains altcoin prices very well. The last three years of data give us the formula to convert net liquidity into altcoin market value.
The chart below shows changes in net liquidity and altcoins' total market cap(excluding ETH) over the last three years.
There are two scales on the chart. This way, we can compare net liquidity and total altcoin market value (excluding ETH). Net liquidity increased by 92% in 2021. In contrast, the total market value of the altcoin increased by 7.4 times. In the first half of 2022, net liquidity decreased by 14%. The altcoin market value decreased by 138%. That means the price movement in altcoins is 8 to 10 times greater than the change in liquidity. Since price volatility decreases with each new crypto cycle, I will accept the 8x figure. So, for example, if net liquidity increases by 10% in 2024, altcoin prices will increase by 80%.
The critical question is: To what level will the net FED liquidity, currently 6.38 trillion dollars, reach at the end of 2024? Futures pricing shows interest rates will decrease by 1.5% in 2024. On the other hand, there is an election in the USA in the fall of 2024. Politicians want to enter elections with plenty of money in the market. Because abundant cash ensures that the economy is vibrant and stocks gain value, even though the FED is an independent institution, it will consider the sensitivities of the ruling party in its decisions.
Interest rate cuts are also expected in Europe in 2024. European economies, which are weak compared to the USA, need monetary incentives more.
The following news was published on Bloomberg yesterday.
The People's Bank of China announced that it carried out a reverse buyback operation of 50 billion yuan ($7.06 billion) and injected 1.45 trillion yuan ($250 billion) of medium-term loans to "maintain reasonable and sufficient liquidity in the banking system."
We estimate that there will be interest rate cuts worldwide in 2024. Therefore, liquidity will increase. Above, we determined an 8-fold conversion rate for the liquidity increase and the total altcoin value. If liquidity rises by 15% for the entire year, the total value of altcoins can increase twice. The main increase in altcoin values will likely occur in 2025 because it takes time for risk appetite to increase.
TL;DR
A high positive correlation exists between Fed net liquidity and altcoin total market cap. Since the market caps of altcoins are relatively small, a 1% increase in liquidity leads to an 8% increase in altcoins. This relationship works similarly in the negative direction. FOMO, FUD, and leveraged transactions contribute to these high price changes. Some crypto ecosystems also include financial mechanisms that accelerate price movements. I can give DEFI and game ecosystems as examples in this context.
FED net liquidity has increased by approximately $600 billion since November 10. Abundant liquidity led to a rally in the crypto market. We know that liquidity conditions will be market-friendly in 2024. European and Chinese central banks will also contribute to the process.
It is difficult to predict how much liquidity will increase in 2024—knowing that the upward liquidity direction will make crypto investing attractive. After strengthening confidence, we can see altcoins make their first rally in the bull market. There are quite a few coins that have already rallied. For example, the SPS price is 140% above the October low.
Like last year, we will closely follow macroeconomic indicators such as unemployment, inflation, and interest rates. After gaining initial momentum with the support of liquidity conditions, altcoins can continue to move forward with the momentum they have created.
Thank you for reading.
liquidity is a very important concept. as you say, if net liquidity increases, it may be logical to infer that cryptocurrency prices will increase. However, I believe that we should not offer certainty in financial numbers. The liquidity increase prediction for 2024 seems reasonable. Thanks for the valuable information. A topic worth following.
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