The U.S. M2 money supply has reached a record $22.02 trillion, climbing 4.5% year-on-year in June, yet cryptocurrency markets continue their downward trajectory, raising questions about liquidity dynamics.

Analysts suggest this disconnect stems from risk aversion rather than insufficient liquidity. According to Caladan Research head Derek Lim, “$22 trillion does not imply $4 trillion in crypto valuation,” as substantial capital remains “parked” in money markets and short-duration Treasuries rather than flowing into risk assets.

Broad Money Supply Rises to Record High

This significant expansion of the M2 money supply typically correlates with increasing asset prices, yet the pattern appears to be holding at the crypto market level.

Cryptocurrency market capitalization has declined by approximately $117 billion since Wednesday, dropping from a peak of $4.05 trillion.

Liquidity Assessment: Pooled but Not Deployed

Several factors explain the liquidity conundrum:

• Markets remain cautious amid “market fatigue” following previous bull runs
• Despite loose monetary conditions, risk sentiment has cooled
• “We’re seeing elevated options activity and increasing liquidation risk,” notes Republic Technologies CEO Daniel Liu

The ongoing volatility stems partly from heightened leverage positions, with leveraged long positions in altcoins reaching concerning levels.

According to Caladan Research, a single $89 million long liquidation of XRP exemplifies the “forced selling” that is accelerating the market decline. Ethereum faces a substantial ask-side supply of $260 million that must be cleared before breaking above the $4,000 threshold.

Altcoins Face Greater Leverage Risks

Digital asset performance diverges significantly:

• BTC slides 3% since reaching Thursday’s peak
• Ethereum drops 4.8%
• Solana falls 6.2%
• XRP plunges 7.1%

Solana’s market position appears particularly vulnerable with “leverage outpacing spot demand,” increasing liquidation risk.

Market Cooling with Potential for Consolidation

Analysts suggest the current market decline amid record liquidity could be temporary.

“We’ve just come off a massive price rally, and the market needs time to consolidate,” says Liu. “Expect short-term volatility across the board, but the long-term thesis remains intact.”

Despite the joint record, market conditions appear characterized by a “healthy correction” according to Caladan’s Lim, with “no evidence of a cycle-ending breakdown yet.”