Bitcoin Falls, Liquidity Rises – Economist Warns Traders Are Missing the Big Picture

Bitcoin’s recent price drop is masking a wider shift toward renewed liquidity in the U.S. financial system. Analysts are observing signs of a possible altcoin rotation as Bitcoin dominance faces rejection at a key moving average. Economist James Thorne argues that Bitcoin’s long-term fundamentals strengthen during periods of volatility due to its fixed scarcity and the rising global supply of fiat currency. Thorne believes the current price slump is not a verdict on cryptocurrency itself, but rather a side effect of an ongoing liquidity transition in the United States.

End of the QT Era and the Liquidity Turn

Thorne identifies two primary catalysts injecting liquidity back into the markets: the reopening of the U.S. government and the Treasury's ongoing management of the Treasury General Account. He asserts that this process effectively concludes the Federal Reserve's quantitative tightening cycle, which had already been decelerating. According to Thorne, markets are at the cusp of a liquidity expansion, not its end, and asset prices may have overreacted before recognizing this shift.

Thorne anticipates a continuation of interest rate cuts, projecting the federal funds rate to approach approximately 2.75%. He also forecasts a significant reshaping of the Federal Open Market Committee over the next two years. His forecast includes Jerome Powell's departure in 2026, which he believes will mark the end of a prolonged period of Keynesian-leaning policy dominance within the central bank, paving the way for a different ideological balance.

Policy Mistakes and the Housing Market Freeze

Thorne points to the housing sector as the clearest indicator of the consequences stemming from prolonged monetary tightening. He contends that policymakers were slow to acknowledge cooling demand, relying too heavily on backward-looking indicators. This delay, he argues, allowed credit channels to deteriorate significantly before any easing measures were implemented.

The resulting stagnation, Thorne explains, has impacted a sector that traditionally serves as a powerful engine for economic growth.

Bitcoin Dominance Flashes a Familiar Pattern

Simultaneously, another market structure signal has captured the attention of analysts. Michaël van de Poppe has observed that Bitcoin dominance is exhibiting a pattern reminiscent of the period preceding a major rotation in 2019. This pattern has recently seen Bitcoin dominance rejected at the weekly 20-day moving average.

Van de Poppe interprets this rejection as a potential precursor to a downward trend in Bitcoin dominance. Such a scenario would typically involve capital gradually flowing from Bitcoin into altcoins as investors regain their risk appetite. If this historical cycle repeats, the market could be entering a phase where liquidity supports broader cryptocurrency participation, rather than remaining concentrated solely in Bitcoin.

Bitcoin at the Crossroads of Two Monetary Systems

Thorne posits that Bitcoin is positioned at a critical juncture, bridging the era that is concluding and the one that is emerging. He anticipates a continued deepening of adoption, particularly as regulatory frameworks become clearer and institutional constraints diminish. In his view, the global expansion of fiat money supply and Bitcoin's mathematically fixed scarcity are on an inevitable collision course, a scenario that inherently favors an asset designed to resist debasement.

Thorne observes that volatility often causes investors to withdraw precisely when Bitcoin's long-term investment case is strengthening. He suggests that fear can prevent individuals from recognizing that liquidity shifts frequently present the most significant opportunities. Thorne encapsulates his perspective by stating that a bull run concludes when liquidity dries up, not when it begins. He views the current selling pressure as noise, while the underlying liquidity trend represents the true signal.