At BlockTraderHub.com, we’re constantly in search of the major forces pulling the strings in this fast-changing environment of cryptocurrency. Among those, one that has stood the test of time as a major important driver is global liquidity, including how it could affect Bitcoin’s price. As recent history has shown, a wave of global liquidity can send Bitcoin skyrocketing to new all-time highs. Understanding this correlation is critical to making the best possible investments.
The concept of global liquidity is tied to how easy or difficult it is to purchase or sell assets on the global market. The M2 money supply is another of those key indicators. It is the broadest definition that counts all of the currency and other liquid money assets in an economy. This covers paper currency as well as checking account deposits, savings accounts, money market funds, and other small time deposits. For better or worse, when the global M2 money supply grows, capital tends to become relatively more abundant. That capital is allowed to flow into many asset classes, Bitcoin included.
Perhaps the best example is the correlation between global liquidity and Bitcoin’s price. As I wrote previously, Bitcoin has historically done well when there is an easing of worldwide liquidity. Of the various year-over-year growth rates of different global M2 money supplies, this one has shown the highest negative correlation with Bitcoin’s price. We know that Bitcoin’s price often reflects global liquidity. That’s right—this correlation happens more than 83% of the time on a 12-month basis. This robust linear relationship implies that tracking global liquidity trends can provide useful advanced warning for up (or down) Bitcoin price movements.
Understanding the M2 Money Supply
The M2 money supply is an essential stress test metric for understanding the overall health and direction of capital flows. As we noted, it’s a more flexible definition that includes all types of money. Together, this makes it a useful, holistic measure of the liquidity flowing through an economy. An increasing M2 money supply indicates there’s more capital to invest. As that new money pours in, it can then pump the prices of assets, Bitcoin included.
The global M2 money supply is the best leading indicator for capital flow into risk assets. This applies to investments in Bitcoin (BTC) as well. This positive correlation further emphasizes the connection between Bitcoin and the M2 money supply around the world. Indeed, correlation coefficients often exceed 84%. Unsurprisingly, Bitcoin’s price tends to correlate better with global M2 liquidity. In fact, this two-term correlation is typically stronger than that between the S&P 500 and global liquidity. This further highlights the extent of Bitcoin’s sensitivity to global monetary conditions.
It's important to note that this correlation isn't foolproof. The 12-month rolling correlation between Bitcoin and global liquidity isn’t so steady. This frequently occurs when the MVRV Z-score has a fast declining negative slope from its peak historical heights. In short, the MVRV Z-score is a gauge of how much Bitcoin is overvalued or undervalued compared to its fair value. This highlights that during times of highly stressed market conditions, extreme scenarios can break the expected relationship between liquidity and price.
Tracking Global Liquidity and Its Impact
To effectively track global liquidity and interpret its potential impact on Bitcoin, consider the following:
Global Liquidity Index (GLI): Utilize the GLI provided by the Bank for International Settlements (BIS). This index captures the momentum of global liquidity and can provide a valuable overview of the current market environment.
iShares 20+ Year Treasury Bond ETF (TLT): Monitor the TLT to gauge the effect of GLI on bond prices. Bond prices often react to changes in liquidity conditions, providing an additional layer of insight.
Nasdaq 100 Index (NDQ): Track the Nasdaq 100 index and compare it with the Global Liquidity Index since 2008 to observe the historical relationship between the two. This comparison can help you understand how liquidity impacts tech stocks and other growth-oriented assets.
BIS GLIs: Use the BIS GLIs to track foreign currency credit to non-bank borrowers, covering both loans extended by banks and funding from global bond markets. This provides a more granular view of liquidity flows.
Central Bank Balance Sheets: Keep an eye on central bank balance sheets, money supply figures, and key US liquidity accounts. Understanding these factors can provide insights into the overall private sector balance sheet and net savings.
The Path to a Potential New All-Time High
Further analysis indicates that Bitcoin’s current market cycle began forming in June 2023. So far, this cycle is playing out as it has in the past. We may want this cycle to operate like cycles of the last 40 years. Usually, the blow-off top comes much later in the phase, for increasingly lesser returns every time.
Few analysts dared to dream higher than these projections given these trends. As terms of the Matt Crosby described hypothetical world optimism took Bitcoin to unbelievable heights. As of noon on November 22nd, 2024 it had reached an all-time high of $99,637 on Oanda, $99,543 on Coinbase and $99,555 on Gemini. These price points are illustrative, but they show the magnitude of achievable increases. If the current cycle plays out according to historical precedent, we might witness some pretty remarkable outcomes. Bitcoin’s been really statistically trending upwards. While its supply cannot be enough to meet the demand, the price will continue to increase every day.
It’s important to keep in mind that these are all estimates, and the crypto space remains highly unpredictable. Things such as an economic recession, unknown regulatory risk, or a black swan market event could easily change the trajectory. As always, it is important to view any projections with a healthy dose of skepticism.
Staying Informed
With the cryptocurrency landscape constantly evolving, staying informed is essential for safely exploring this exciting new market. To keep learning, and for deeper insights, check out BitcoinMagazinePro.com. By staying informed and carefully monitoring global liquidity trends, investors can better understand the potential drivers of Bitcoin's price and make more informed decisions.
Whether Bitcoin can break new all-time highs has much more to do with an evolving series of organic factors. Of these, global liquidity is the most important factor. Though today’s trends continue to favor the positive, the future is unpredictable, and all industry members must stay sharp in response to market fluctuations.
