The risk-off sentiment observed last week has been confirmed. Data validates Bitcoin’s weekly losses, a broad sell-off in equity markets, gains in gold and silver, and a spike in the volatility index. It has been confirmed that the supply of stablecoins on exchanges contracted by approximately $6.5 billion—the sharpest weekly decline of the year—while the U.S. dollar-based money supply reached a record high of $23.4 trillion, marking a 5.7% year-over-year increase. Furthermore, momentum indicators approaching oversold territory and widening high-yield credit spreads align with these findings.

The trend line has been broken, but the story does not end here.

Last week, Bitcoin broke the upward trend line that had sustained it for a long time, causing the price to retreat toward a critical long-term support zone. In technical terms, a trend line acts like the handrail of a staircase that a price climbs; when the handrail breaks, the decline accelerates because the level where buyers once felt secure has lost its validity.

The wave of selling that immediately followed the break was fueled by the forced liquidation of leveraged long positions. In other words, some of the selling did not come from traders who actively chose to sell, but rather from positions already in the red that could no longer be sustained. Such sell-offs are typically sharp but short-lived, often marking the moment the market hits bottom.

Momentum indicators are currently nearing oversold territory. This suggests that the selling pressure is beginning to physically exhaust itself, though it is not, by itself, a guarantee of a reversal. What remains to be watched is whether the price can reclaim the broken trend line and whether the support zone around $75,000 will hold. Why are stablecoin wallets emptying out?

Last week, the supply of stablecoins on exchanges shrank by approximately $6.5 billion—the sharpest weekly decline seen all year. This figure is significant because stablecoins serve as the "ready cash" component of the crypto market. Anyone looking to make a new purchase, waiting on the sidelines, or preparing to open a position relies on this capital. When this cash supply dwindles, purchasing power declines—much like a retail store that cannot accept new customers once its cash register is empty.

The mechanism here is quite straightforward: when stablecoin issuance increases, fresh capital enters the market, creating new buying power. Conversely, when issuance slows, the remaining funds either retreat to avoid risk or exit the crypto ecosystem entirely. The current situation points toward the latter scenario; risk appetite has clearly waned.

That said, drawing conclusions about a permanent exodus based on a single week’s data could be misleading. Some of this sell-off might simply be a temporary reaction—a loss of confidence following a major cyber incident. The key indicator to watch is whether the stablecoin supply continues to fall below $292 billion, or if it rebounds above $300 billion, signaling a stabilization.

Is the M2 record the hidden engine for the long term?

While the short-term outlook may appear bleak, something intriguing is unfolding behind the scenes. As of October, the U.S. dollar-denominated money supply has reached an all-time high of $23.4 trillion, growing at an annual rate of 5.7%—the fastest pace seen in recent years. Having hovered around a few trillion dollars throughout the 2000s, this figure shifted into an entirely different league following a massive surge in 2020, and it has never looked back since.

The relationship between money supply and risk assets serves as one of the most reliable compasses for long-term investors. As the amount of money circulating within an economy increases, a portion of it inevitably flows into assets—such as stocks, commodities, and cryptocurrencies—in search of higher returns. Consequently, periods of expansion in the money supply have historically acted as a tailwind for risk assets. A similar mechanism was at play behind the post-2020 crypto boom.

However, a word of caution: this record does not necessarily explain current price movements. Think of the money supply as the "climate" and price action as the "weather"—a storm can still erupt even when the overall climate is warm. In the immediate term, short-term interest rate expectations and a tightening of liquidity are the dominant forces. What investors should monitor is whether the expansion of the money supply continues and how—or when—it eventually translates into market liquidity. For the patient investor, this is the framework to keep in mind during moments of panic.

Why are credit spreads sounding a silent alarm?

Beyond the realm of crypto, there exists another indicator—far less closely watched, yet equally significant: the risk premiums on high-yield bonds. These spreads measure the additional interest that the most vulnerable borrowers are forced to pay. Last week, these risk premiums widened toward their highest levels of the year, signaling that markets have become more hesitant to lend to riskier companies.

Think of it using a tree analogy: stocks are the leaves at the top, while the credit market represents the trunk and roots. When the roots begin to dry out, the leaves may still appear green, but the tree’s health has already begun to deteriorate. The widening of credit spreads is precisely this—an early warning sign of a loss of confidence that has not yet fully manifested in the stock and crypto markets.

To provide a balanced view, it is worth noting that while these spreads are at their widest point in the past year, they remain well below historical averages. In other words, this is an alarm, but not necessarily a harbinger of a collapse. The key factor to watch is whether this widening accelerates; if it does, the flow of capital into risk assets could thin out significantly.

Interest rates and the dollar 🤔

Underpinning all these developments is a broader trend: as U.S. Treasury yields rise, the dollar continues to strengthen. A robust gain of 165,000 jobs in October, coupled with a declining unemployment rate, reinforces the Federal Reserve’s hawkish stance; the market now assigns a high probability to another interest rate hike in December. As interest rates climb, the opportunity cost of holding cash decreases, while the appeal of risk assets diminishes.

To put it simply, the chain reaction looks like this: strong economic data leads to expectations of rate hikes, which drives up bond yields and strengthens the dollar—ultimately putting pressure on crypto and equities. Last week, every link in this chain was in motion, a situation further compounded by the fact that annual inflation remains at a concerning level of 3.7%. This scenario does not necessarily call for unmitigated pessimism. If the economy is this robust—meaning companies are profitable, employment remains steady, and demand holds firm—it does not create a poor environment for risk assets in the long run. The real question is when the liquidity squeeze will ease. The CPI data to be released on Tuesday will be the most critical indicator of whether such a loosening is on the horizon.

What should individual investors take away from this week?

As we wrap up the week, here is the most honest advice I can offer: you cannot fully grasp the movements of any asset class without first understanding the dynamics of liquidity. This week, stocks, cryptocurrencies, and high-risk credit were all sold off, while gold and silver saw an influx of buying. This is no coincidence; capital shifted away from risk and toward "safe havens"—a rotation that was already mapped out in liquidity indicators.

The primary lesson from the market is the importance of distinguishing between different time horizons. In the short term, you may see reactions driven by the contraction in stablecoins and pressure from interest rates; however, in the long term, record-breaking money supply and supply-demand dynamics tell a different story. Periods where these two realities collide are not for those who act in haste, but for those who carefully observe the underlying processes. Tuesday’s CPI data, followed by commentary from Federal Reserve officials, will reveal which of these forces is gaining the upper hand. You should manage the risk of your positions by looking at the entire picture, rather than focusing on a single week.

👉This content is for informational purposes only and does not constitute investment advice.✔️

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