New Balance and Prospects of Crypto Assets After Financial Market Fluctuation

Recently, the financial markets have experienced a week of turmoil caused by tariff frictions, and finally welcomed a brief respite over the weekend. This sudden event led to a flight to safety and fluctuations in market sentiment, but its duration is still difficult to predict. Once the market adapts to the fundamental changes brought by the tariffs and releases the flight to safety sentiment, the financial system will seek to rebalance. This also explains why global stock markets, especially the US stock market, closed higher last Friday, ending a week of fluctuations. This can be seen 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 triggered by the pandemic in 2020. After this rare and significant fluctuation comes to a pause, the trends in the Crypto Assets market will refocus on long-term factors such as inflation and interest rate cuts. The interest rate cut policy can bring growth opportunities for risk assets represented by Bitcoin.

By comparing the global broad money supply (M2) over the past 10 years with the Bitcoin trend, a high correlation between the two can be clearly observed. The significant increase in Bitcoin over the past 10 years is built on the substantial growth of global M2, and this correlation far exceeds that of other financial indicators.

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 metric worth paying attention to — the central bank's asset scale. This metric reflects the liquidity condition of domestic currency and is closely related to the rise and fall of Bitcoin.

Historically, changes in central bank asset sizes often precede significant fluctuations in the Bitcoin and crypto assets markets. Interestingly, during the Bitcoin bull market in 2017, the Federal Reserve did not adopt a "quantitative easing" policy; instead, it raised interest rates three times throughout the year and implemented quantitative tightening. However, risk assets led by Bitcoin still performed remarkably well that year, which is closely related to the central bank asset size reaching a new high that year.

It is worth noting that as of January 2025, the total deposits in our country amount to 42.3 trillion USD, far exceeding the United States' 17.93 trillion USD. This indicates that from the perspective of deposit scale, our country has greater financial potential. If liquidity improves, it may bring about new market changes.

Although there are still some limitations on whether liquidity improvements can flow into the Crypto Assets market, Hong Kong has already given positive signals in terms of policy, showing significant improvements compared to the environment a few years ago.

In this situation, investors need to closely monitor changes in domestic and international financial data, including trends in monetary policy tools such as reserve requirement cuts and interest rate reductions. At the same time, they should remain vigilant and be bold in seizing market opportunities when they arise to achieve asset appreciation.