What we read: Bitcoin: a measure of global liquidity
I’m fascinated by the dramatic increase in global liquidity during 2024, driven by widespread money printing and debt expansion, and how this affects the price of Bitcoin.
Bitcoin is an expression against the government’s expansionary monetary policies, so its price follows global liquidity, as shown here. On this chart.
It was great to read the latest a report Written by Lynn Alden and Sam Callahan analyzing Bitcoin’s relationship to global liquidity. This reaffirmed my view that further monetary expansion drives more people to use Bitcoin, increasing prices.
Their careful analysis found that over 12-month periods, Bitcoin’s price moves in the same direction as global liquidity a remarkable 83% of the time. This is higher than any other major asset class, making Bitcoin a uniquely pure measure of global liquidity trends.
The report quantified Bitcoin’s correlation with the global M2 money supply, finding a very strong overall correlation of 0.94 between May 2013 and July 2024. Bitcoin’s 12-month rolling average correlation was 0.51, while stocks and gold showed fairly high correlations also in the 0.4 range. to 0.7. ranges.
Of course, the relationship between Bitcoin is not perfect. Short-term crashes can occur around cryptocurrency-specific events such as an exchange hack or the collapse of Ponzi schemes.
Supply and demand imbalances also cause temporary decoupling when Bitcoin reaches extreme overvaluation levels during the peak of a market cycle. But despite these breakdowns, the long-term relationship still exists.
Currently, liquidity is rising to unprecedented levels, indicating that Bitcoin may soon embark on a massive bull run if this relationship continues. Although I believe that no model perfectly captures the complexity of Bitcoin, recognizing its role as a monetary canary in the coal mine can offer valuable insight. If history holds true, Bitcoin’s alarm sirens are ringing loudly that a liquidity-driven boom will soon occur.
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