Liquidity, War, and the Limits of Policy

Liquidity, War, and the Limits of Policy

It is becoming increasingly difficult to separate macro from geopolitics.

Markets right now are not being driven by traditional economic narratives. They are reacting to headlines. Oil and US bond yields have become the dominant variables, dictating risk across asset classes in real time.

Everything else is downstream.

Bitcoin's performance over the past weeks reflects this shift. Despite clear liquidity headwinds from rising yields, a stronger dollar, and elevated bond volatility, Bitcoin has outperformed most macro assets since the conflict escalated.

That should not be ignored.

The Return of the Tail Hedge

In our previous letter, we outlined how Bitcoin sits at both extremes of the risk distribution.

That framework is now playing out.

On one side, higher oil prices, rising yields, and a stronger dollar are tightening financial conditions. These are traditionally negative for liquidity sensitive assets like Bitcoin.

On the other, Bitcoin continues to act as a non sovereign, borderless hedge against instability in the global system.

As the existing geopolitical order is being reshaped, traditional safe havens are no longer behaving in predictable ways. The number of assets perceived as neutral is shrinking.

Bitcoin and gold sit at the center of that shift.

Why Gold Is Not Confirming the Narrative

One of the more surprising developments has been the relative weakness in gold.

At first glance, this appears contradictory. In periods of geopolitical stress, gold has historically been the default safe haven. Yet recent price action suggests something different.

The explanation lies not in fundamentals, but in flows.

Gold's strong performance over the past year was driven largely by reserve accumulation from central banks, particularly in Asia and the Middle East. Following the freezing of Russian assets in 2022, gold transitioned from a passive hedge into an active reserve asset for surplus economies.

This created a new regime.

Gold became tied not just to fear, but to trade surpluses and sovereign capital flows.

That linkage introduces a vulnerability. When those surpluses are disrupted, the demand supporting gold weakens.

The closure of the Strait of Hormuz is not just a geopolitical shock. It directly impacts export revenues and the excess savings that have been recycled into gold reserves. As fiscal pressures rise, reserve accumulation can slow or even reverse.

Gold is not failing as a hedge.

It is temporarily constrained by a liquidity squeeze on sovereign balance sheets.

Once those flows stabilise, gold is likely to reconnect with its fundamental drivers.

Bitcoin's Structural Reset

While gold faces structural pressure, Bitcoin is moving in the opposite direction.

The heavy selling that defined late 2025 and early 2026 is fading. Profit taking has collapsed dramatically, signaling that the majority of forced sellers have already exited the market.

This is a classic sign of seller exhaustion.

At the same time, retail demand remains muted. Spot volumes are low, derivatives funding rates are negative, and downside protection continues to be bid.

In other words, caution still dominates sentiment.

Yet beneath the surface, positioning is improving.

Institutional demand has returned. Bitcoin ETFs have recorded more than 1.5 billion dollars in net inflows since the conflict began, reversing a significant portion of earlier outflows.

Morgan Stanley's entry into the ETF market further reinforces the idea that institutional interest remains strong.

The market is transitioning from forced selling to controlled re-risk positioning.

The Supply Overhang

From a structural perspective, the setup is becoming increasingly constructive.

Bitcoin has seen steady accumulation in the 60,000 to 70,000 range, creating a base of support. However, overhead supply remains.

Short term holders are concentrated just above current price levels, while a larger supply cluster exists around the mid 80,000 range.

For a sustained upward move, the market will need to absorb this supply.

A clean break above the 74,000 level would be a key signal that demand is strong enough to push through resistance.

Until then, consolidation remains the most likely path.

Markets Are Misreading the Shock

While Bitcoin's internal structure is improving, the broader macro narrative has taken a more hawkish turn.

Markets are increasingly pricing in rate hikes as the energy shock feeds into headline inflation. This interpretation appears flawed.

Supply driven inflation is fundamentally different from demand driven inflation.

Raising interest rates does not reopen supply chains or resolve geopolitical disruptions. It simply suppresses demand.

Central banks operate with a medium term horizon. Temporary price spikes driven by supply shocks are typically looked through, particularly when growth is already slowing and labor markets are cooling.

Responding aggressively risks damaging the broader economy.

It is, quite literally, like burning down the house to cook the turkey.

The Bond Market Is the Signal

The bond market is now the most important indicator to watch.

Recent moves in yields, particularly at the long end, suggest markets are pricing a more aggressive policy response than is likely to materialise. At the same time, longer term inflation expectations are declining, indicating that markets expect disinflation over the medium term.

This divergence matters.

If central banks maintain overly tight policy in response to a supply shock, the result will be slower growth and ultimately lower inflation.

In that scenario, yields should stabilise or move lower.

There is also a clear threshold emerging.

US long term yields approaching 5 percent appear to act as a trigger point for policy communication and potential intervention. Beyond that level, financial conditions tighten rapidly, increasing the risk of broader instability.

Contained yields and lower bond volatility would provide the foundation for risk assets to stabilise.

Markets are, at their core, a function of rates and liquidity.

The Path Into Volatility

The near term outlook remains uncertain.

Geopolitical tensions continue to drive sentiment. Market positioning remains cautious. Volatility is likely to persist as key events unfold.

Yet beneath that volatility, the structural setup is improving.

Bitcoin continues to demonstrate resilience despite adverse macro conditions. Institutional demand remains present. Liquidity conditions are gradually becoming more supportive.

In this environment, Bitcoin continues to serve a unique role.

It remains both a hedge against systemic instability and a high beta expression of liquidity.

That dual function has not changed.

Native News

Coinbase announced a partnership with Better Home and Finance to enable crypto backed mortgages. Borrowers will be able to use Bitcoin or USDC as collateral for home purchases without needing to liquidate their holdings. The structure is designed to integrate with existing mortgage systems while managing volatility risk. (CoinDesk)

Tether has engaged KPMG to conduct its first full audit of USDT financial statements and has brought in additional support to strengthen internal systems. The move signals a push toward greater transparency as the company explores expansion within the evolving US regulatory framework. (Bloomberg)

Institutional Corner

A new working paper from the European Central Bank highlights the concentration of governance within major decentralised finance protocols. The findings suggest that a relatively small group of token holders exerts significant influence over key decisions, raising important questions for future regulatory frameworks. (Reuters)

In the United States, David Sacks is stepping down from his role in the administration after reaching the limit for special government employees. During his tenure, he played a central role in shaping the current crypto policy agenda and supporting initiatives such as a strategic Bitcoin reserve. (CNBC)

Brazil has introduced new legislation allowing authorities to seize digital assets linked to organised crime. The law expands enforcement capabilities and reflects a broader trend of integrating crypto into existing legal frameworks. (CoinDesk)

Structural Adoption Continues

Beyond macro and policy, adoption continues to move forward.

Mastercard is accelerating its stablecoin strategy through acquisition, prioritising speed over internal development. Tokenisation efforts are expanding across asset classes, with increasing focus on real world applications such as housing and exchange traded products. (Bloomberg)

At the same time, legislative efforts to provide clearer protections for decentralised finance developers are progressing, though challenges remain.

Institutional positioning continues to evolve.

ARK Invest has reduced exposure to both technology stocks and Bitcoin ETFs, reflecting a more cautious stance in the current environment.

This is not a reversal of the trend.

It is part of the cycle.

Final Thought

Markets are currently being driven by forces that sit outside traditional economic models.

Geopolitics is shaping liquidity. Liquidity is shaping risk. And risk is shaping Bitcoin.

In the short term, volatility will remain.

In the long term, the direction remains unchanged.

Bitcoin continues to gain relevance as both a macro asset and a structural component of the global financial system.

In uncertain environments, that combination becomes increasingly valuable.

Keep stacking.