Introduction

The relationship between Bitcoin (BTC) and the global money supply (M2) has become a critical point of analysis for investors and economists alike. As central banks around the world adjust their monetary policies, particularly in response to economic challenges, the effects ripple through various markets, including cryptocurrencies. This article delves into how changes in M2 money supply growth and potential FED rate cuts correlate with Bitcoin’s price movements, offering insights into why these factors could signal bullish trends in the crypto market.

Understanding M2 Money Supply

M2 represents a measure of the money supply that includes cash, checking deposits, and easily convertible near money. It is a broader indicator than M1 (which only includes cash and checking deposits) and is often used to gauge the amount of money circulating in an economy.

Central banks, like the Federal Reserve, influence M2 through monetary policy decisions. During times of economic downturn, these institutions may increase the money supply to stimulate growth. Conversely, they may reduce M2 growth to curb inflation. These actions can significantly impact asset prices, including that of Bitcoin.

The Correlation Between Bitcoin and M2 Growth

Historically, Bitcoin’s price (Black line) has shown a notable correlation with the M2 money supply growth rate (Blue line). Let’s break down the key trends observed over the years:

1. 2014-2015 M2 money supply contracted

During this period, the M2 money supply growth was either stagnating or decreasing. This decline in money supply growth correlates with the drop in Bitcoin prices, emphasizing the negative impact of reduced liquidity on BTC’s market performance. As the global money supply tightened, the demand for risk assets like Bitcoin likely decreased, leading to a bear market followed by market consolidation until 2016.

2. 2016-2018 Bull Market

During this phase, M2 growth continues at a steady pace. The rebound in BTC’s price as M2 growth remains positive further supports the idea that increasing money supply provides a favorable environment for BTC price appreciation followed by a short period of price correction going 2019 with steady M2 growth.

3. 2020-2021 Pandemic Response

The COVID-19 pandemic prompted the US Federal Reserve to drop the interest rate from 2% to 0% and effectively turned on the money printer for central banks to inject unprecedented amounts of liquidity into the global economy. The rapid expansion of M2 during this time coincided with one of Bitcoin’s most explosive bull markets. Investors flocked to Bitcoin as a hedge against potential inflation and currency devaluation, both of which were driven by the massive increase in money supply.

4. 2023-2024 Stabilization

Recent trends show a stabilization in M2 growth, with Bitcoin’s price reflecting a period of consolidation or moderate growth. Jerome Powell’s announcement at the Jackson Hole Symposium regarding the possibility of upcoming rate cuts could significantly impact the crypto industry. As the well-known global macro investor Raoul Pal explained in one of his YouTube videos, this period is what he calls ‘The Banana Zone’. This is when the US Federal Reserve cuts the interest rate, prints money, and the liquidity returns to the crypto market.

The Impact of Potential FED Rate Cuts

As the Federal Reserve (FED) navigates an economic landscape marked by inflation and slowing growth, there is increasing speculation about potential rate cuts. If the FED opts to reduce interest rates, it could significantly impact the M2 money supply and, by extension, the crypto market.

• Increased Liquidity: Lower interest rates typically lead to an increase in borrowing and spending, which can expand the M2 money supply. As more money flows into the economy, investors may turn to assets like Bitcoin, which is often viewed as a hedge against inflation and currency devaluation.
• Bullish Sentiment for Crypto: Historically, periods of FED rate cuts have coincided with bullish trends in the crypto market. As traditional assets offer lower returns due to reduced interest rates, investors often seek higher yields in alternative assets, including cryptocurrencies. This influx of capital can drive up Bitcoin’s price, leading to a broader bullish trend in the crypto market.
• Renewed Investor Confidence: Rate cuts signal that the FED is committed to supporting economic growth, which can renew investor confidence. This optimism can spill over into the crypto market, where Bitcoin and other cryptocurrencies are seen as viable investment options in a low-interest-rate environment.

Why This Correlation Matters

Understanding the correlation between Bitcoin, M2 money supply growth, and potential FED rate cuts is essential for several reasons:

• Investment Strategy: Investors can use M2 growth and interest rate trends as indicators of potential Bitcoin price movements, allowing them to make more informed decisions.
• Inflation Hedge: Investors seek assets like Bitcoin, perceived as inflation hedges, when central banks increase the money supply and cut rates, which may decrease the value of traditional currencies.
• Market Trends: Recognizing the patterns between M2 growth, rate cuts, and Bitcoin can help in anticipating broader market trends, especially in times of economic uncertainty.

Conclusion

The correlation between Bitcoin, M2 money supply growth, and potential FED rate cuts underscores the importance of global liquidity and monetary policy in shaping market dynamics. As central banks continue to navigate complex economic landscapes, understanding these relationships will be crucial for investors seeking to capitalize on Bitcoin’s market movements. By keeping an eye on M2 growth rates and potential FED actions, investors can better predict Bitcoin’s price trends and make strategic investment decisions.

Disclosures: Not investment advice. The Author, Sarson Funds, Inc. and its affiliated managers may hold positions in the projects mentioned. Talk with your financial advisor before making any investment decisions or have them contact Sarson Funds directly at [email protected].