Financial markets have experienced a resurgence in risk-taking since the final quarter of 2022. However, while the prevailing consensus is optimistic, some observers are urging caution as key indicators point to potential fiat liquidity pressures on the horizon.

Bitcoin (BTC), the leading cryptocurrency by market value, hit a low near $15,500 in November and has since doubled, reaching $31,000. In the past two weeks alone, prices have risen by nearly 20%, driven in part by Fidelity's application for a spot-bitcoin ETF. Similarly, Wall Street's tech-heavy Nasdaq index bottomed out in late 2022 and has since rallied by almost 50%, while the broader S&P 500 index has gained 25% during the same period.

However, cautionary signals are emerging as widely-tracked fiat liquidity metrics, such as the Fed net liquidity indicator and the global net liquidity indicator, are showing declines. Lewis Harland, Portfolio Manager at crypto fund Decentral Park Capital, highlights this trend, stating that "market liquidity measures (global, U.S. domestic) point lower and would be unusual for BTC to be constructive with both liquidity measures declining over the coming weeks." Harland emphasizes the importance of these indicators and suggests that their implications may be overlooked by investors.

Fiat liquidity conditions play a crucial role in influencing the performance of risk assets, including bitcoin and stocks. Historically, turning points in fiat liquidity conditions have coincided with significant market valuations for these assets.

According to data from TradingView and Decentral Park Capital, the global net liquidity indicator, which considers the fiat supply of major economies, has reached its lowest level since November 2022, standing at $26.5 trillion. Additionally, the Fed net liquidity indicator, which measures the amount of U.S. dollars available in the system, has declined from $6.3 trillion to $6 trillion in recent weeks.

Further signs of potential risk aversion are apparent as bank reserves held at the Federal Reserve are decreasing. This decline in reserves indicates a tightening and can have adverse effects on credit extension.

The sustainability of the rally in the S&P 500 and bitcoin comes into question as bank reserves continue to drop, as highlighted by tweets from Sven Henrich, the founder and lead market strategist at NorthmanTrader, and Douglas Orr, Founder of Endeavour Equity Strategy. The MSCI All Country World Index (ACWI) also exhibits a similar divergence from the total assets held by the big five central banks (the Fed, ECB, BOJ, PBOC, and BOE), which serves as another measure of fiat liquidity.

In conclusion, crypto traders are approaching bitcoin with caution as fiat liquidity measures suggest potential challenges ahead. The declining liquidity indicators raise concerns about the sustainability of the current bullish market sentiment. Investors should remain vigilant and consider the impact of these indicators on the performance of risk assets, such as cryptocurrencies, while assessing the potential risks associated with evolving fiat liquidity conditions.