What Is Bitcoin Telling Us? | Michael Howell, Macro Analyst

Michael Howell’s central claim is that liquidity drives Bitcoin, but Bitcoin’s recent resilience may itself be useful information about liquidity. It has made him reconsider the outlook, not conclude that liquidity has turned. His base case is that the global-liquidity cycle, which typically lasts five to six years, will not bottom until the second half of 2027. The cycle peaked in the fourth quarter of the previous year and has been moving down; speculation, which often lasts 9–12 months, is nearing its usual duration, making turbulence the likely next phase. An earlier turn could lead the data and begin a two- to three-year bull market. Howell would change his view if Bitcoin held above $70,000 and bank reserves showed further evidence of being managed or pushed higher.

Howell says the Federal Reserve and Treasury are actively managing money-market conditions, with the Fed focused on maintaining ample bank reserves rather than relying chiefly on the federal funds rate. In his account, the Fed can precisely affect reserves, and reducing them can drain liquidity. About a year earlier, reserve declines coincided with higher repo spreads and money-market shortages; the Fed responded with Reserve Management Purchases, which Howell considers quantitative easing despite the Fed’s terminology. Reserves and money-market liquidity have since been largely flat, which he reads as evidence of close management. The Treasury is also seeking to limit volatility by replacing illiquid, off-the-run Treasuries with newer, shorter-duration debt; Howell says some off-the-run securities have been retired for roughly 60 cents on the dollar.

Current conditions still look restrictive to Howell: financing is harder to raise, the yield curve has flattened, credit spreads are beginning to widen, and the Russell 2000 is probably in a bear market. Fed and Treasury interventions could make the turbulence shorter and shallower, however, and bring a rebound sooner than his base case. His framework shows liquidity declining as the real economy picks up, with liquidity leading the real-economy cycle by about 18 months on average. September’s global-liquidity data showed a rise that he attributes almost entirely to Federal Reserve actions; he is unsure whether it will persist or signal a milder downturn. He says higher Treasury yields mainly reflect stronger rate expectations amid robust nominal GDP growth, not deteriorating U.S. fiscal finances. The U.S. term premium has been broadly sideways, while term premiums in the U.S., Germany, and China are low and, if anything, falling.

Howell defines liquidity roughly as net private-sector assets divided by their duration. More government debt issuance, much of it in short-term bills, adds private-sector assets while reducing average duration, which he sees as liquidity-positive; he says much of the expansion is currently funding real-economy government spending. Bitcoin is a long-duration asset and therefore sensitive to Treasury yields, so stable or falling yields would be favorable, all else equal. Howell views Bitcoin mainly as a monetary-inflation hedge, while much of the rest of crypto behaves more like a real-economy asset, closer to technology stocks. In a liquidity downswing he expects Bitcoin to outperform other crypto; in an upswing, he expects altcoins to outperform Bitcoin, with an Ethereum-Bitcoin spread one possible expression of that view.

Bitcoin has been more sensitive to global liquidity than gold over its roughly 15-year history, though Howell says that sensitivity is declining as institutional participation grows. The host cited estimates that liquidity explains 40–45% of Bitcoin’s drivers, that Bitcoin’s sensitivity has recently been about five times gold’s, and that global liquidity rose from roughly $185 trillion a year earlier to about $196 trillion at the time of recording. Howell argues that debt tends to grow exponentially while liquidity moves cyclically, and that mismatches can contribute to crises. Over time, he says, debt and liquidity need to grow in harmony: if debt expands around 8% annually, liquidity would need to do likewise. Above 7% annual liquidity growth, liquidity would double in about a decade; Bitcoin could also easily double over that period if the cycle eventually turns higher.

Howell recommends holding both gold and Bitcoin, weighted for volatility: more gold relative to Bitcoin now, with the option to raise Bitcoin’s portfolio weight if its volatility falls. He considers both monetary-inflation hedges, but says gold’s longer record means he would not call Bitcoin definitively the best liquidity hedge. He estimates gold’s global-liquidity multiplier at about 1.25, so a 10% liquidity increase corresponds to roughly a 12–15% rise in gold. Gold compounded at more than 8.5% over roughly 25 years, and Howell expects U.S. federal debt to compound at about 8–9% over the medium term, supporting his expectation that gold will rise. He attributes much of gold’s recent rise to Chinese liquidity injections beginning in early 2022, while acknowledging sanctions on Russia and “great debasement” as contributors; the correlation he describes is suggestive, not conclusive.

In Howell’s broader cycle framework, equities and credit tend to benefit during rebound, commodities during speculation, and bond duration during turbulence; he favors trimming equities and reducing credit in speculation, and avoiding equities and commodities in turbulence. Small caps tend to do well in an upswing and large caps in a downswing; technology tends to lead in the upswing. He says technology earnings growth has helped extend the equity rally despite falling price-to-earnings multiples, but he cannot tell whether that growth will last. Outside the largest technology stocks, he sees little strong equity outperformance and says many international markets resemble the Russell 2000.