Since 2020, a correlation between net liquidity, bitcoin, and the S&P 500 has formed. Recently, S&P 500 diverged from this pattern amid the US election race.
Global Liquidity and Its Role
Market liquidity generally refers to the influx of money into the economy and its subsequent inflow into cryptocurrencies and securities. This process is regulated by the US Federal Reserve through changes in the credit rate. Since the start of the coronavirus pandemic, risk asset markets have been highly correlated with net liquidity levels. However, amid the US elections in 2024, the S&P 500 temporarily diverged from this correlation.
Where the Money for Growth Comes From
With the loss of dynamics in the risky asset market, monetary aggregates such as M2 began to grow. This growth can be attributed to inflows into money market funds (MMFs), which invest only in short-term highly liquid instruments. According to a 2024 report by Morgan Stanley, US MMF assets reached $7 trillion, with retail funds surpassing institutional funds in contributions.
What Was Actually Happening?
A new study published by the Bank for International Settlements (BIS) noted that stablecoins are negatively impacted by US monetary policy. The report observed differing impacts on MMFs and stablecoins due to monetary policy tightening. BIS highlighted that the decline in stablecoin capitalization is attributed to the reaction of Tether and USDC.
Market correlations with liquidity have changed amidst recent political and economic conditions. Stablecoins are likely to become the centerpiece in future digital asset dynamics.
