What we’re reading: Bitcoin: a barometer of global liquidity
I am interested in the large increase in global liquidity in 2024 due to widespread money printing and debt expansion, and how that will affect the price of Bitcoin.
Since Bitcoin is an expression of opposition to government monetary expansionist policies, its price follows global liquidity, as seen here. In this chart.
What I read recently was interesting. report Analysis of the correlation between Bitcoin and global liquidity by Lyn Alden and Sam Callahan. This further reaffirmed my view that further financial expansion will drive more people to Bitcoin and drive the price up.
Their rigorous analysis found that over a 12-month period, Bitcoin’s price moves in the same direction as global liquidity an astonishing 83% of the time. This is higher than any other major asset class, making Bitcoin the only pure barometer of global liquidity trends.
The report quantified the correlation between the global M2 money supply and Bitcoin and found that the overall correlation from May 2013 to July 2024 was very strong at 0.94. Bitcoin’s 12-month average rolling correlation was 0.51, while stocks and gold also had a moderately high correlation between 0.4 and 0.7. range.
Of course, Bitcoin’s correlation is not perfect. Short-term outages can occur around cryptocurrency-specific events such as exchange hacks or Ponzi scheme collapses.
Supply and demand imbalances also cause temporary decoupling when Bitcoin reaches extreme overvaluation levels at the peak of a market cycle. However, despite this breakdown, the long-term relationship continues.
Liquidity has now risen to unprecedented levels, suggesting that if this relationship holds, Bitcoin could soon embark on a massive bull run. Although I believe that no model perfectly captures Bitcoin’s complexity, recognizing Bitcoin’s role as a monetary canary in the coal mine can provide valuable insight. If history is anything to go by, the Bitcoin siren is ringing loudly that a liquidity-driven boom is just around the corner.
