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Why Has Bitcoin Dumped 50% When Global Liquidity Has Increased?

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Why Has Bitcoin Dumped 50% When Global Liquidity Has Increased?


Most analysts are blaming a lack of liquidity for Bitcoin’s dire performance, but there is more to it than just that. 

Bitcoin’s 50% decline from all-time highs in just four months comes at a time when global liquidity has increased, which counters the common premise that the price follows liquidity.

“The divergence is striking, and it demands explanation,” said Chris Tipper, chief economist and strategist at the Ainslie Group. Global liquidity has climbed around $5 trillion since Bitcoin’s peak in October and is now almost $190 trillion, according to Ainslie Wealth.

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However, this is being driven by the People’s Bank of China, which added $1 trillion in 2025 and likely another trillion this year, said Tipper.

Chinese Favor Gold Over Bitcoin

Chinese liquidity doesn’t flow into Bitcoin (which is banned), it flows into gold reserves, domestic infrastructure, and the real economy, he added.

“So when you strip out the Chinese contribution and look only at the Western liquidity that Bitcoin actually responds to, momentum peaked in October and has been decelerating since.”

Gold markets reacted to this and reached all-time highs in late January, with the precious metal trading just 5% down from that peak today. Bitcoin responded to the Western component and corrected.

“Two assets, same headline liquidity number, opposite performance, entirely explained by the bifurcation.”

The economist concluded that when Western liquidity momentum re-accelerates, whether from a Federal Reserve response to market stress, dollar weakness, or a “disorderly event that forces intervention,” Bitcoin has significant ground to recover.

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The US Dollar Index (DXY), as a “rough proxy for Western liquidity, seems to support your argument,” commented Abra CEO and Algorand chairman, Bill Barhydt.

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The DXY has recovered in recent days following the escalation of military strikes in Iran. From a low of 97.5 in late February, it climbed to 99.6 on Tuesday as the dollar strengthened, according to TradingView. A stronger dollar is also bad news for Bitcoin markets.

BTC Price Outlook

At the same time, Bitcoin tanked below $67,000 again in late trading on Tuesday but managed to recover to $68,500 by Wednesday morning in Asia.

The asset has seen heavy resistance at $70,000 and is unlikely to break above it until Western liquidity improves through Fed rate cuts or more money printing.

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Crypto World

Aave’s TVL Falls $8B After $293M Kelp DAO Hack

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Aave’s TVL Falls $8B After $293M Kelp DAO Hack

Total value locked on decentralized lending protocol Aave dropped by nearly $8 billion over the weekend after hackers behind the $293 million Kelp DAO exploit borrowed funds on Aave, leaving roughly $195 million in “bad debt” on the protocol and triggering withdrawals.

Data from DeFiLlama shows that Aave’s TVL fell from about $26.4 billion to $18.6 billion by Sunday, losing the top spot as the largest DeFi protocol. 

Aave v3’s lending pools for USDt (USDT) and USDC (USDC) are now at 100% utilization, meaning that more than $5.1 billion worth of stablecoins cannot be withdrawn until new liquidity arrives or borrows are repaid. 

$2,540 is available to be withdrawn from the $2.87 billion USDT pool on Aave v3 at the time of writing. Source: Aave

Aave’s TVL fall shows how rapidly risk from a single security incident can spread throughout the broader, interconnected DeFi lending market, potentially leading to a severe liquidity crisis.

The incident began on Saturday when hackers stole 116,500 Kelp DAO Restaked ETH (rsETH) tokens worth about $293 million from Kelp DAO’s LayerZero-powered bridge and used them as collateral on Aave v3 to borrow wrapped Ether (wETH).

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Crypto analytics platform Lookonchain said the move created about $195 million in “bad debt” on Aave, which contributed to the Aave (AAVE) token tanking nearly 20% from $112 on Saturday at 6:00 pm UTC to $89.5 about 25 hours later. 

Lookonchain noted that some of the largest crypto whales to withdraw funds from Aave were the MEXC crypto exchange and Abraxas Capital at $431 million and $392 million, respectively.

Source: Grvt

Several crypto networks and protocols tied to rsETH or the LayerZero bridge have paused use of the bridge until the problem is resolved, including DeFi platform Curve Finance, stablecoin issuer Ethena and BitGo’s Wrapped Bitcoin (WBTC).

Aave has frozen several rsETH, wETH markets

Shortly after the Kelp DAO exploit, Aave said it froze the rsETH markets on both Aave v3 and v4 to prevent any suspicious borrowing and later stated that rsETH on Ethereum mainnet remains fully backed by underlying assets.

WETH reserves also remain frozen on Ethereum, Arbitrum, Base, Mantle and Linea, Aave said.

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This incident marks the first significant stress test of Aave’s “Umbrella” security model, which was introduced in June 2025 to provide automated protection against protocol bad debt while enabling users to earn rewards.

Related: Aave DAO backs V4 mainnet plan in near-unanimous vote

Earlier this month, the Bank of Canada found that Aave avoided bad debt in its v3 market by using overcollateralization, automated liquidations and other strategies that shifted risk to borrowers.

In comments to Cointelegraph, Aave defended its liquidation-based model, framing it as a core safety mechanism that protects lenders while limiting downside for borrowers.

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It comes as Aave parted ways with its longest-standing DeFi risk service provider, Chaos Labs, on April 6, following disagreements over the direction of Aave v4 and budget constraints.

Magazine: Are DeFi devs liable for the illegal activity of others on their platforms?