Let me explain "liquidity" a little bit first. Liquidity is an overused word. It essentially refers to the amount of funds in the market. There are many indicators. Generally speaking, we pay most attention to the liquidity indicators of the four major banks (Fed, ECB, BOJ, PBOC). Among them, ECB/BOJ is generally highly synchronized with the Fed, so we mainly look at the Fed and PBOC. Of course, the recent interest rate hike by BOJ is a disturbance factor.

If we look at M2 from the PBOC, at the beginning of 2023, the M2 growth rate reached more than 12%, which is considered high liquidity. But it has been declining since then. In July, the annual growth rate of M2 was 6.3%, which is lower than the previous level, which is considered a contraction.

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From the backtesting point of view, the biggest correlation with the price of the cryptocurrency market is the liquidity of the Federal Reserve. There are many items in the Federal Reserve's balance sheet. At present, the better algorithm is total assets - RRP - TGA, which is actually roughly matched with the changes in bank reserves.

We can roughly divide the past two years into the following stages:

- From November 21 to the end of 22, there is a bear market, BTC 6.7w - 1.7w

- From the beginning of 2023 to March 2024, it was a bull market, BTC 1.7w. - 7.1w, this was also supported by ETFs in January 2024

- From April 24 to now, it is a weak bear market: BTC 7.1w - 5.8w

If we compare the "liquidity" in the figure (black line, right axis) with the bull and bear markets, they roughly correspond.

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What drives liquidity changes? We can see:

The liquidity dropped significantly from the end of 1/21 to the end of 22, mainly due to the reduction of the total assets of the Federal Reserve and the increase of onRRP (this increase reduces liquidity). onRRP can be understood as a high-interest current account opened by the Federal Reserve for the market. There is more money here, and there is less money in the market.

The liquidity increased slightly from the beginning of 2/23 to March 24, and the core driving force was the sharp decline in onRRP. This was mainly due to Yellen's financial skills. She sold a lot of short-term bonds and exchanged the cash in onRRP.

3/From April 24 to now, overall liquidity has declined slightly. The core driver here is that TGA and ONRRP have remained basically unchanged, while the total assets of the Federal Reserve have been slowly declining.

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If we look back, onRRP has basically hit bottom, falling from a peak of 2 trillion to 330 billion. OnRRP basically cannot support the ammunition depot of the bull market.

TGA is 790 billion, which is actually at a relatively high level. However, TGA has basically not declined in the past year. In other words, Yellen basically did not spend the "old money" in his hands, but borrowed money while spending. The Biden administration is currently in a state of shutdown, so before the new government takes office, do not expect TGA to serve as an ammunition depot.

The last one is the total assets of the Federal Reserve. When will this stop? There is a sentence in the life of the Federal Reserve in May 22: "The Committee intends to slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level it judges to be consistent with ample reserves."

It seems that 3 trillion bank reserves is a consensus figure as the end point. Today, the bank reserves are 3.46 trillion. JPMorgan Chase and Goldman Sachs predict that the Fed will stop QT in November 24 and the first quarter of 25 respectively.

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in conclusion:

The above analysis of TGA, onRRP, and fed assets that will affect liquidity in the future is as follows:

- There is not much money left in onRRP

- TGA doesn't look likely to hold up much ground before the new government

- The reduction of total assets will stop around the end of 2024 or the beginning of 2025

It is estimated that the remaining time of 24 years will still be in this weak bear market state, and the bull market is expected to start from the beginning of 25 years.