Liquidity cycles and Bitcoin: a 4-cycle view
Four liquidity cycles, four Bitcoin cycles, one uncomfortable overlap. What the model concludes from it, what it refuses to conclude, and why the Bitcoin cap is arithmetic rather than opinion.
Dear reader,
Bitcoin has had four complete cycles since 2011, and the world has had four complete liquidity cycles in roughly the same span. The overlap is uncomfortable for both camps. Bitcoin's believers do not like hearing that the asset trades as a high-beta expression of global money supply; liquidity analysts do not like the implication that a 15-year-old asset with no cash flows is one of the cleanest gauges they have. This brief lays out the four cycles side by side, explains what we do and do not conclude from them, and shows how the model sizes an asset it refuses to time.
The four cycles
We measure liquidity as the three-month impulse of a global broad-money aggregate — the sum of M2 in the US, euro area, Japan and China, converted at market rates — combined with the change in the four major central-bank balance sheets. It is not a perfect measure. It is public, reproducible from FRED and central-bank sites, and it has turned before every major top and bottom in risk assets since 2008.
- Cycle 1 (2012–2015). Post-crisis expansion through QE3; Bitcoin's first mainstream bubble peaked in December 2013, about four months after the liquidity impulse peaked. The 2014–15 bear coincided with the taper and the first dollar squeeze.
- Cycle 2 (2015–2019). China's 2016 credit impulse restarted global liquidity; Bitcoin's 2017 mania peaked in December, two months after the impulse peaked. The 2018 bear ran alongside quantitative tightening and Fed hikes.
- Cycle 3 (2019–2022). The pandemic response was the largest liquidity impulse on record. Bitcoin peaked in November 2021, six months after the impulse peaked and one month before the Fed's hawkish pivot. 2022 was the sharpest contraction of both.
- Cycle 4 (2023–2026). China's easing and the end of quantitative tightening in the US turned the impulse positive in early 2023; spot ETF approval in January 2024 added a structural buyer. The impulse peaked in mid-2025. It is now −1.2 % and falling.
The lead-lag is not stable — two, four, six months — and the amplitude of Bitcoin's response has fallen each cycle as the asset has grown. But the direction has been consistent: Bitcoin has not made a sustained high while the liquidity impulse was negative.
What we conclude, and what we do not
We conclude that Bitcoin belongs with the liquidity-sensitive holdings, alongside equities and against gold and cash, and that its weight should be lowest when the liquidity index is contracting. That is what the model does: in a risk-off regime Bitcoin sits at the bottom of its band in every profile.
We do not conclude that we can time it. Four cycles is four observations. A lead-lag that ranges from two to six months is not a trading signal; it is a description that helps you hold the position with less anxiety.
We also do not conclude that Bitcoin has "decoupled" because of ETF flows, as some argued in 2024. The 2025 drawdown, which arrived when the liquidity impulse turned down and not before, was a fairly direct refutation. ETF flows changed who holds the asset, not what drives its price.
Why the cap is 15 %
This is the question we get most often about the model, and the answer is arithmetic rather than opinion. Bitcoin's realised volatility over the past three years has averaged about 55 % annualised — roughly four times that of global equities. Portfolio risk contribution scales with weight times volatility (and correlation), so a 15 % Bitcoin sleeve contributes about as much risk as a 60 % equity sleeve. In the Growth profile, that means Bitcoin at its cap and equities at 64 % are, in risk terms, roughly equal partners. Above 15 %, one asset would dominate the portfolio's outcomes, and a portfolio dominated by one asset is not diversified whatever its label says.
The caps in Balanced (10 %) and Conservative (6 %) follow the same logic with a smaller risk budget. In a risk-off regime the weights fall to 8, 6 and 3 %. None of these numbers are a view on price. They are a view on how much of the portfolio's variance a single asset is allowed to explain.
What a drawdown looks like at these weights
Bitcoin has fallen more than 75 % from peak in each of its four cycles. At a 15 % weight, a 75 % fall costs the portfolio just over 11 points if nothing else moves — a very bad year, survivable. At the 8 % risk-off weight, which is where the model would most likely be by the time such a fall was underway, the cost is 6 points. At a 40 % weight, which is what some "macro-aware" portfolios carried in 2021, the cost is 30 points, and behavioural research is unambiguous about what most people do at −30: they sell at the bottom. The cap is there to keep you in the position.
Where cycle 4 stands
The liquidity impulse is −1.2 % and has been negative for six weeks. Bitcoin is 31 % below its 2025 high. The model has Bitcoin at the bottom of its band in every profile and will not add until the impulse turns positive and holds. That could be next quarter or in 2028; we have no forecast. What we can say is that, historically, the periods when the impulse was negative and Bitcoin was already 30 % down have not been the periods to reduce further — the model's bands are designed so that the reduction has already happened by the time the drawdown is obvious.
M2SL, WALCL and ECBASSETSW plus the BoJ and PBoC balance-sheet releases, all listed in our data sources. Pro accounts can export the banded allocation rules and replay them against the historical regime archive, which is how we check them ourselves.How our model allocation changed this week
| Asset | Last week | This week | Δ | Reason |
|---|---|---|---|---|
| Equities | 47 % | 45 % | −2 | Meter 44 → 41; equity sleeve steps toward band floor |
| Bonds (total) | 27 % | 28 % | +1 | Intermediate duration added as growth momentum softens |
| Gold | 16 % | 17 % | +1 | Toward top of band with liquidity contracting |
| Bitcoin | 6 % | 6 % | 0 | Already at band floor |
| Cash | 4 % | 4 % | 0 | No change |
Balanced profile shown. Changes are within the 5-point weekly cap. Growth profile made the equivalent 2-point equity reduction.
Rulebook Wealth Editorial. The brief is written from the week’s published data. Every chart cites a public series and every model figure carries the version that produced it. Corrections are appended with a date, never silently edited. Data sources · Editorial policy
Want to check this brief’s charts yourself? Every series identifier we cite is listed in the data sources, and Pro accounts can export the allocation, bands and caps as JSON or CSV from the portfolio builder.