Vivek: Unsurprisingly, Bitcoin price follows global liquidity

What we read: Bitcoin: A Global Liquidity Barometer

I was intrigued by the significant increase in global liquidity in 2024 driven by massive 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 seen here on this chart.

It was fascinating to read Lyn Alden and Sam Callahan’s recent report analyzing Bitcoin’s correlation with global liquidity. This further reconfirmed my point that greater monetary expansion drives more people to Bitcoin, driving up prices.

Their rigorous analysis found that over 12-month periods, the price of Bitcoin moves in the same direction as global liquidity 83% of the time. This is higher than any other major asset class, making Bitcoin a unique pure barometer for global liquidity trends.

The report quantified Bitcoin’s correlation with global money supply M2, finding a very strong overall correlation of 0.94 between May 2013 and July 2024. Bitcoin’s 12-month average correlation was 0.51, while stocks and gold showed moderately high correlations also in the 0.4 to 0.7 range. range.

Of course, the Bitcoin correlation is not perfect. Shorter-term crashes can occur around crypto-specific events like exchange hacks or the collapse of Ponzi schemes.

Imbalances between supply and demand also cause temporary decoupling when Bitcoin reaches extreme levels of overvaluation during market cycle peaks. However, despite these breakdowns, the long-term relationship persists.

Right now, liquidity is rising to unprecedented levels, suggesting that Bitcoin could soon embark on a massive run if this relationship holds. While I believe no model perfectly captures Bitcoin’s complexity, recognizing its role as a monetary canary in the coal mine can provide valuable insight. If history is anything to go by, the Bitcoin sirens are sounding loudly that a liquidity-driven boom will soon take place.