Recent research has delved into the relationship between bitcoin prices and global money supply, noting that they’re highly correlated.
On Sept. 25, the founder of Lyn Alden Investment Strategy announced that her recently commissioned research paper has measured global money creation relative to other asset classes.
Alden’s paper revealed that bitcoin moves in the direction of global money supply (M2) 83% of the time and more than other assets.
Bitcoin has demonstrated a strong correlation with global liquidity, making it a potential “liquidity barometer,” the research noted.
Bitcoin Liquidity Barometer
As global liquidity expands, measured through metrics like M2 money supply, bitcoin’s price typically rises; conversely, it tends to decline when liquidity contracts.
Over a study period from May 2013 to July 2024, the research showed a correlation coefficient of 0.94 with global liquidity, indicating a highly sensitive relationship.
M2 money is a measure of the money supply that includes cash, checking deposits, and easily convertible near money. It encompasses M1 money, including physical currency, savings accounts, and short-term deposits. It is also used as an indicator of the money available in the economy, influencing inflation, interest rates, and overall economic activity.
When comparing other assets, Alden commented that stocks have earnings that can affect their correlation, and gold has “defensiveness,” which can affect its correlation.
“Bitcoin is treated like risk-on gold, basically. So it has the highest correlation.”
The researchers found that bitcoin’s strong correlation with global liquidity is influenced by its high volatility, which can distort its shorter-term correlations.
The paper concluded that this correlation with global liquidity makes bitcoin “a valuable macroeconomic barometer for investors and traders.”
“One can think of Bitcoin as a mirror reflecting the rate of global money creation and the relative strength of the dollar.”
Earlier this year, Lyn Alden predicted that BTC prices would reach $200,000 within two years.
M2 Increasing
Earlier this week, market analyst ‘Game of Trades’ told his 247,000 X followers that the M2 money supply was entering expansion after reaching the deepest contraction level since 1960.
According to the St. Louis Federal Reserve, the M2 money supply started contracting in March 2022 and began increasing again in March 2024. It is currently $21.17 trillion in the United States, up 2% over the past six months.
The implications for bitcoin prices are extremely bullish, as many analysts have predicted that a crypto market bull run will begin in the fourth quarter.