Bitcoin [BTC] is currently confronting notable market changes, primarily stemming from an anticipated decline in Net Fed Liquidity slated for the latter part of September.
Renowned analyst Tomas is predicting a drainage of liquidity ranging from $300 billion to $550 billion, which could impact risk assets like Bitcoin, gold, and the S&P 500.
Despite a long-standing strong correlation between Net Fed Liquidity and Bitcoin over the past four years, this relationship remains subject to sudden alterations.
Traditionally, these liquidity drops have had adverse effects on Bitcoin, resulting in downward price trends. Nonetheless, a partial reversal is anticipated by 1 October, offering a glimmer of hope for a potential recovery.
Analyzing Historical Performance
From September 2022 to August 2024, Bitcoin has demonstrated a positive average daily performance of +0.26%.
During periods of “large Fed Liquidity drops,” however, this performance dipped to -0.13%, accentuating the impact of diminished liquidity on BTC’s value.
While Bitcoin has exhibited resilience during specific liquidity downturns, it generally aligns with the medium-term trends of Net Fed Liquidity.
Since 2020, for instance, the BTC/USD pair has either stagnated or declined during liquidity downtrends, only showcasing strength during uptrends.
It is likely that this trend will persist unless the Federal Reserve halts its ongoing Quantitative Tightening (QT) measures.
The upcoming insight on QT may be unveiled during the FOMC meeting scheduled for 18 September, offering more clarity on future liquidity trajectories and their repercussions on Bitcoin’s value.
Price Chart Analysis
Bitcoin recently breached the 4-hour 200 exponential moving average (EMA). At present, the cryptocurrency is trading at $60k after rebounding from the $52k support level.
This shift over the 200EMA suggests that BTC could be on track for upward price movements in the short and medium term, particularly amidst indications of market momentum and strength.
If Bitcoin manages to sustain this position, the upward momentum is likely to persist into October, even as the liquidity reversal looms closer.
Divergence in Bitcoin’s Supply
Furthermore, the supply dynamics of Bitcoin have revealed a significant disparity. As of now, Bitcoin’s circulating supply amounts to approximately 19.8M, with 14.6M BTC or 73% categorized as illiquid supply.
Illiquid supply denotes Bitcoin held by entities that seldom engage in trading activities, rendering it inaccessible for market transactions.
This escalation in illiquid supply diminishes overall market liquidity. On the contrary, the liquid and highly liquid supply stands at 5.2 million BTC, actively traded and readily accessible.
This imbalance between illiquid and liquid supply introduces an additional dimension to Bitcoin’s price fluctuations.
Trend in Active Addresses
Lastly, although Bitcoin’s transaction count has reached a record high, active addresses have witnessed a sharp decline. This diverging trend contrasts with previous bullish periods during which both transactions and active users typically surged simultaneously.
In essence, despite the escalating price and robust market momentum, fewer users are presently engaging in Bitcoin transactions.
According to Glassnode, this discrepancy signals a shift in market behavior that could impact Bitcoin’s value in the upcoming months.
Overall, Bitcoin’s price appears primed for a potential upswing. Nevertheless, liquidity patterns and supply dynamics will persist as vital influencing factors.