Besides the Federal Reserve (FED) cutting interest rates, there is another important data that determines the future trend of crypto.

In addition to closely following the point shaving situation in the United States, it is also necessary to pay attention to changes in domestic financial data.

Written by: Blockchain Knight

After a week of turbulent tariff frictions, the market finally had some breathing room over the weekend. However, it is still uncertain how long this respite will last, as the tariff issue is an event-driven contingency that leads to capital flight and a temporary collapse of sentiment, resulting in significant volatility.

However, once the market confirms the fundamental changes brought about by tariffs and the release of risk aversion sentiment, the entire financial market can find a new balance. This is also why global stock markets, especially the US stock market, ended last week with gains on Friday after a week of fluctuations, as we can see from the changes in the volatility index of the S&P 500.

It can be seen that last week the VIX index reached a recent high, and the only events in the past few years that could “compare” with it are the extreme incident of the Bank of Japan’s interest rate hike last year and the financial turmoil caused by the pandemic in 2020. This is also why the market experienced such large fluctuations in the past week, as such historical occurrences are rare.

So, when this huge volatility comes to a pause, the factors influencing the Crypto market’s trend will return to the old discussions of “inflation” and “interest rate cuts”, because only interest rate cuts can lead to “point shaving” and also bring growth hopes for risk assets led by BTC.

By comparing the global broad money supply (M2) over the past 10 years with the trends of BTC, we can analyze this correlation. The chart below clearly shows that the significant increase in BTC over the past 10 years is built on the explosive growth of global M2, and this correlation trend far exceeds that of other financial data.

This is also why whenever the Americans are about to release data related to inflation or interest rate cuts, BTC always experiences fluctuations, because it ultimately affects whether new funds can enter the Crypto space.

But currently, it seems that most people in the Crypto market are only focusing on the interest rate cut path of the Federal Reserve, while neglecting another data point worth following—the PBOC asset scale, which reflects the current liquidity situation of our country’s currency.

While everyone is following the financial markets on the West Coast, they are precisely neglecting our own financial liquidity, which is actually just as closely related to the fluctuations of BTC, after all, we are a great country, one of the top two.

The chart below shows the changes in the growth of BTC over the past 3 cycles compared to the growth of PBOC’s asset scale. It can be seen that this correlation fluctuates almost throughout every major rise of BTC and corresponds precisely with the cycle that occurs once every 4 years.

The liquidity of the PBOC played a role in the Crypto bull market of 2020-2021, the bear market of 2022, the recovery from the cycle low from late 2022 to early 2023, the surge in the fourth quarter of 2023 (before the BTC ETF approval), and the pullback from the second to the third quarter of 2024.

Similarly, a few months before the 2024 U.S. elections, the liquidity of the PBOC turned positive again, just bringing about a wave of “election bull”.

However, in the figure below, we can see that the scale of POBC began to decline after September 2024, reaching a bottom at the end of 2024 and currently rising to a high point not seen in the past year. From the perspective of data correlation, changes in PBOC liquidity usually precede significant fluctuations in the BTC and Crypto markets.

Interestingly, during the BTC bull market in 2017, the Federal Reserve was not the one engaging in “point shaving”; instead, it raised interest rates 3 times throughout the year and there was quantitative tightening. However, risk assets led by BTC still performed very optimistically in 2017, as the scale of the PBOC reached a new high that year.

There is also a certain correlation between the liquidity of the PBOC and the increase in the S&P 500. Historical data shows that the annual correlation coefficient between the total assets of the PBOC and the S&P 500 is approximately 0.32 (based on data from 2015 to 2024).

Of course, in a certain sense, it is also because the timing of the PBOC’s quarterly monetary policy report overlaps with the Federal Reserve’s interest rate meeting, so the correlation will be amplified in the short term.

In summary, we can find that in addition to closely following the point shaving situation in the U.S., we also need to pay attention to changes in domestic financial data. A week ago, the news was released: “Monetary policy tools such as reserve requirement ratio cuts and interest rate cuts have sufficient room for adjustment and can be implemented at any time.” What we need to do is to track this change.

It is worth noting that, in terms of asset scale, by 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. It must be said that, from the perspective of deposit scale, we have more financial possibilities. If liquidity improves, there may be some changes.

Of course, another point that needs to be discussed is whether the liquidity of funds, if available, can flow into the cryptocurrency market, as there are still certain restrictions. However, Hong Kong has already provided an answer; from the perspective of policy looseness and convenience, it is different from a few years ago.

Finally, let me conclude this week’s commentary with a quote from Lei Jun, “When the wind rises, even pigs can fly.” It’s better to ride the wave than to row against the current. What we need to do, besides waiting, is to have the courage to ascend the steps when the wind rises and soar against the wind.