China’s Liquidity Wall Blocks Bitcoin, Fuels Gold Rally

China’s Monetary Expansion Diverts to Gold, Bypassing Bitcoin

In a significant divergence in global capital flows, China, boasting the world’s largest money supply at approximately $47 trillion, is aggressively expanding its monetary base. However, this substantial liquidity is largely inaccessible to Bitcoin, instead finding its way into gold. This phenomenon, dubbed the “liquidity wall” by analysts, highlights how geopolitical and regulatory factors can significantly influence asset performance, even as global liquidity reaches an all-time high of $188.8 trillion.

Understanding China’s Liquidity Cycle

China’s M2 money supply, representing currency in circulation plus demand deposits, has seen consistent year-over-year growth of around 8% since 2018. This steady expansion contrasts sharply with the more volatile liquidity cycles observed in economies like the United States. The People’s Bank of China’s efforts to stimulate its economy, particularly in the wake of the 2021 property market crisis exemplified by the Evergrande conglomerate’s struggles, have led to increased money printing. This strategy mirrors Japan’s “Abenomics” in the late 1990s, aimed at inflating away debt following a property crash and subsequent deflationary period.

Analysts point out that this aggressive monetary expansion in China is primarily directed towards tangible assets like gold. The correlation between China’s liquidity increases and the price of gold has been remarkably strong since 2013, suggesting a direct flow of yuan into the precious metal. This trend is further amplified by global central banks, with Poland being a notable buyer last year, and China accumulating more gold since 2022 than any other central bank. Estimates suggest that central banks may under-report their gold holdings by two to four times, indicating a potentially larger scale of accumulation.

The “Liquidity Wall” and Bitcoin’s Inefficiency

The core of the issue lies in the fundamental differences between gold and Bitcoin as assets. Gold, with a significant portion of its market cap held in jewelry and central bank vaults, is relatively illiquid. In contrast, Bitcoin is highly liquid, with most of its supply actively traded on public markets. This liquidity, however, can also be a double-edged sword.

Data from early 2024 illustrates this stark contrast. While gold saw reported inflows of approximately $269 billion into ETFs and central bank reserves, its market capitalization surged by an astonishing $21 trillion, an increase of 78 times the inflow amount. This suggests that for every dollar invested, gold’s market cap grew by a factor of approximately 78. Bitcoin, during the same period, experienced inflows of $95 billion, leading to a market cap increase of $1.6 trillion, a 17x multiplier. More recently, for every dollar flowing into gold, its market cap increased by 78x, while for Bitcoin, the multiplier was around 4x. This suggests that gold is significantly more capital-efficient in terms of market cap appreciation compared to Bitcoin, with some analyses suggesting gold is at least four times more efficient.

Regulatory Barriers and Trading Correlations

Crucially, China’s ban on Bitcoin trading means that its expanding $47 trillion money supply, which is actively seeking hedges against currency debasement, cannot flow into Bitcoin. This leaves gold as the primary accessible safe-haven asset for this capital. While some Bitcoin may be acquired illegally in China, it constitutes a negligible portion (estimated at 1.5%) of the global trading volume.

Meanwhile, major Western economies like the US, EU, and UK are either contracting their liquidity or not expanding it at a significant pace. The US, for instance, has been shrinking its balance sheet, and while there are plans for liquidity to eventually enter the market, the immediate focus is on managing existing financial system issues. This portion of global capital, which is not undergoing aggressive expansion, is the primary source of liquidity for Bitcoin.

Furthermore, Bitcoin’s trading behavior is heavily influenced by traditional finance, particularly its correlation with technology stocks. Bitcoin’s price action often mirrors that of tech exchange-traded funds (ETFs), such as the iShares Expanded Tech Sector ETF (IGV). This correlation stems from how institutional investors, including hedge funds, allocate capital. They often trade Bitcoin within the same books and strategies as technology assets, leading to synchronized price movements. For example, a significant sell-off in tech stocks on February 5th, which was one of the worst days for hedge funds, also saw a sharp decline in Bitcoin’s price, exacerbated by a spike in the basis trade yield that forced hedge funds to liquidate positions.

Capital Flows as a Dominant Driver

The analysis underscores that global capital flows are the paramount driver of asset prices. China’s expanding liquidity, unable to access Bitcoin due to regulatory bans, is channeled into gold. The remaining global capital, primarily from economies not aggressively expanding their money supply, is the main source of liquidity for Bitcoin. This dynamic, coupled with Bitcoin’s correlation to the tech sector and its relative capital inefficiency compared to gold, paints a complex picture of its current market performance.

While this is not the sole reason for Bitcoin’s price fluctuations, it adds a critical layer of understanding to the intricate global financial markets. The theory suggests that even if Bitcoin eventually solidifies its position as a store of value, a significant portion of global capital, particularly from China, will remain inaccessible to it, while gold continues to absorb this liquidity.

Source: Why 1.4 Billion People Are Banned From Buying Bitcoin (YouTube)