Bitcoin’s next risk is hiding in the gap between debt and liquidity

The traditional relationship where expanding global M2 leads to capital flowing into risk assets like Bitcoin has broken down. Despite M2 growth, Bitcoin has underperformed, with key resistance levels failing to hold. This shift is attributed to changes in the transmission mechanism of liquidity, moving from direct central bank asset purchases to a system dominated by Treasury issuance, reserve management, and bank credit creation. US public debt is now outpacing M2 growth, creating a "plumbing problem" where cash held by the Treasury drains bank reserves, even as M2 expands on paper. This friction, coupled with factors like Treasury funding strain and derivatives, explains Bitcoin's recent underperformance. While a bull case exists for inflation cooling and reserves rebuilding, a bear case suggests persistent debt issuance and sticky inflation will keep financial conditions restrictive, making Bitcoin behave more like a high-beta risk asset. The core issue is whether liquidity expansion is sufficient to absorb the growing debt and Treasury supply, with the current environment suggesting it is not, leading to volatility for Bitcoin.

(Source：CryptoSlate)