Liquidity Alone Can't Sustain Crypto Rally, Economic Uncertainty Plays Key Role
Researchers have found that global liquidity is not enough to sustain a crypto rally on its own. The relationship between monetary policy and cryptocurrency returns is real, but incomplete.
A study published in the Journal of Financial Stability examined data from January 2019 through December 2024 and found that excess liquidity was associated with higher cryptocurrency returns. However, the strength of this relationship depended on economic policy uncertainty.
The study estimated excess liquidity by comparing actual conditions in the United States and China with equilibrium levels derived from macroeconomic variables. It classified each month as either an excess-liquidity regime or a normal regime.
The researchers found that US excess-liquidity regimes were associated with a 12.1-percentage-point increase in average monthly cryptocurrency returns, while rising US economic policy uncertainty reduced the estimated liquidity premium by approximately 54%. Chinese excess liquidity was associated with a 9.3-percentage-point increase in returns.
The study suggests that capital availability and investor confidence must work together for a crypto rally to occur. Central banks can create favorable financial conditions, but they cannot force investors to embrace risk when the policy environment appears unstable.