What we learn: Bitcoin: The Global Liquidity Barometer
I am fascinated by the massive increase in global capital in 2024, driven by massive money printing and credit expansion, and how it affects the price of Bitcoin.
Bitcoin is the expression against the government’s monetary expansion policies, so its price follows global liquidity, as seen here in this chart.
It was interesting to read a recent report by Lyn Alden and Sam Callahan analyzing the relationship between Bitcoin and global liquidity. This also confirmed my theory that increased capital drives more people to Bitcoin, increasing prices.
Their rigorous analysis found that over a 12-month period, the price of Bitcoin moves in the same direction as the rest of the world a remarkable 83% of the time. This is higher than any other major asset class, making Bitcoin an exceptionally clean barometer of global monetary trends.
The report estimated Bitcoin’s correlation with global M2 money supply, finding a strong overall correlation of 0.94 between May 2013 and July 2024. Bitcoin’s 12-month correlation coefficient was 0.51, while stocks and gold showed moderately high correlations and -0.4 to 0.7. width.
Of course, the correlation of Bitcoin is not perfect. Short-term crashes can occur in crypto-specific events such as exchange hacks or the collapse of Ponzi schemes.
The supply-demand imbalance also causes temporary pullbacks when Bitcoin reaches overvaluation levels during market cycle peaks. Yet despite this disruption, the long-term relationship continues.
Currently, liquidity is rising to unprecedented levels, suggesting that Bitcoin may begin a major bull run if this trend continues. While I believe that no model fully captures the complexity of Bitcoin, recognizing its role as a currency in a coal mine can provide valuable insight. If history is any rhyme, Bitcoin’s alarm bells are sounding like a liquidity-driven boom is about to happen.