What we read: Bitcoin: a global liquidity barometer
I’m intrigued by the significant increase in global liquidity in 2024, driven by large-scale money printing and debt expansion, and how this affects the price of Bitcoin.
Bitcoin is a statement against the government’s monetary expansionist policies, so its price follows global liquidity, as seen here on this graph.
It was fascinating to read the recent one report by Lyn Alden and Sam Callahan who analyze Bitcoin’s correlation with global liquidity. This further confirmed my view that more monetary expansion drives more people to Bitcoin, causing prices to rise.
Their rigorous analysis found that over twelve-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 barometer of global liquidity trends.
The report quantified Bitcoin’s correlation with the global M2 money supply and found a very strong overall correlation of 0.94 between May 2013 and July 2024. Bitcoin’s average rolling twelve-month correlation was 0.51, while equities and gold also showed fairly high correlations in the period from 0.4 to 0.7. range.
Of course, Bitcoin’s correlation is not perfect. Shorter-term disruptions can occur around crypto-specific events such as exchange hacks or Ponzi scheme collapses.
An imbalance between supply and demand also causes a temporary disconnect when Bitcoin reaches extreme overvaluation levels during peaks in the market cycle. But despite these failures, the long-term relationship endures.
Right now, liquidity is rising to unprecedented levels, suggesting that Bitcoin could soon embark on a massive bull run if this relationship holds. While I believe no model perfectly captures the complexity of Bitcoin, recognizing its role as a monetary canary in the coal mine can provide valuable insight. If history rhymes, Bitcoin’s sirens are ringing loudly that a liquidity-driven boom will happen soon.