Certain financial indicators have historically been associated with Bitcoin’s performance, such as global money supply (M2). So why isn’t the current significant increase in M2 automatically leading to a rise in BTC?
Global money supply (M2) and Bitcoin: a confirmed decorrelation?
The reality of the cryptocurrency market is changing, and with it the tools historically used to analyze it in order to provide a solid overview and/or forecasts. For example, it is enough to see how Ether’s performance has largely decoupled from that of Bitcoin since last year, to the point where it is no longer possible to anticipate ETH’s delayed rises.
This situation also affects other indicators that are generally quite reliable, such as the global money supply curve, also known as M2. This is a unit of measurement that estimates the liquidity in circulation in the financial system and its previously fairly direct impact on the price of BTC.
Indeed, the greater the amount of global liquidity available, the faster investments in risky assets such as cryptocurrencies accelerate. However, the money supply curve is showing a significant increase, while BTC is currently plummeting below the $85,000 level.
This observation was made by the Finneko analysis organization in a publication on the X network, which attempts to explain this discrepancy that may “give the impression of an anomaly.” However, it would be entirely logical “once we look at what actually makes up this ‘global liquidity’ and, above all, where the increase comes from.”
This is where it all comes down to: Global M2 is rising, but the liquidity available to the markets (in the US and Europe, which fuels risky assets, credit, ETFs, and hedge funds) is not really improving.
Finneko
A liquidity trap made in China
According to Finneko analysts, the current situation is playing out in China. Indeed, a very large part of the acceleration in global liquidity stems from the Chinese government’s attempt to stabilize its financial system, which is plagued by “the real estate crisis, local government debt, and an economy under deflationary pressure.”
This opening of the Chinese monetary floodgates inevitably triggers an increase in the Global M2 indicator, as “China alone accounts for nearly 30% of global liquidity.” The problem? This seemingly abundant capital is not spreading into the real economy, let alone the global market for risky assets.
The money remains in the banking system, used to roll over debt, recapitalize, and plug holes. In short, we are in a kind of liquidity trap with a much less positive dynamic.
Finneko
This situation is exacerbated by the restrictive monetary policy implemented in the United States. This is all the more true given that Bitcoin has historically been much more strongly correlated with the realities of the US market—individual and institutional investors, ETFs, and dollar flows—than with Chinese decisions in this area.
