Analysis of Financial Market Fluctuation and Crypto Assets Prospects

After a week of tariff friction, the financial markets were slightly calm over the weekend. However, whether this calm can be sustained remains uncertain. The tariff issue, as an unexpected event, has led to capital hedging and emotional fluctuation, significantly increasing market volatility.

Once the market adapts to the fundamental changes brought about by tariffs and the release of risk aversion sentiment, the financial market will find a new equilibrium. This explains why global stock markets, especially U.S. stocks, closed higher last Friday, ending a week of turmoil. This is evident 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. This also explains the significant fluctuations in the market over the past week, which is indeed a rare historical situation.

As this huge Fluctuation temporarily calms down, the focus influencing the Crypto Assets market trend has returned to the old topics of "inflation" and "interest rate cuts". Only interest rate cuts can bring about a large-scale influx of funds, providing growth opportunities for risk assets represented 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 massive increase in Bitcoin over the past 10 years is built on the substantial rise in global M2, and this correlation far exceeds that of other financial indicators.

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

However, participants in the current Crypto Assets market seem to be overly focused on the Federal Reserve's interest rate cut path, while neglecting another important indicator - the central bank's asset scale. This indicator reflects the current liquidity situation of domestic currency.

In fact, the scale of central bank assets is closely related to the rise and fall of Bitcoin. Historical data shows that this correlation has almost run through every major increase in Bitcoin and corresponds with the cycle that occurs every four years.

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

It is worth noting that the central bank's asset scale began to decline after September 2024 and reached a bottom before recovering at the end of 2024, currently reaching a high point of the past year. In terms of data correlation, changes in central bank liquidity typically lead to significant fluctuations in the Bitcoin and Crypto Assets market.

Interestingly, during the Bitcoin bull market in 2017, the Federal Reserve was not the "money printer"; 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, as the central bank's asset size reached a new high that year.

Even from the perspective of the S&P 500 index's increase, there is a certain correlation with the central bank's liquidity. Historical data shows that the correlation coefficient between the central bank's total assets and the annual S&P 500 index 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 need to closely monitor not only the monetary policy of the United States but also the changes in domestic financial data. Recent news has stated: "Monetary policy tools such as reserve requirement ratio cuts and interest rate cuts have sufficient adjustment space 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, there are more financial possibilities in our country. If liquidity improves, it may bring about certain changes.

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

Overall, the market environment is like a "tailwind"; what we need to do, besides waiting, is to be bold in seizing the opportunities when they arise, and to embrace new challenges and opportunities.