Global M2 Money Supply And Bitcoin

Global M2 Money Supply Is A Key Metric For Your Trading Toolbox

In our 18 February post, we highlighted a useful metric to watch is the open interest in the derivatives market The power of that metric is enhanced when combined with the global M2 money supply.

The dominant factor that drives markets is financial conditions.

Financial conditions determine the liquidity in markets, and liquidity influences the direction of markets.

The global M2 money supply is a good proxy for global liquidity.

The global M2 money supply represents the total value of the currency issued by 21 of the major central banks. It includes cash, savings deposits, and any other form of money in circulation.

Global macro investor Raoul Pal first highlighted the correlation between the global M2 and the bitcoin price.

He noted that gold follows financial conditions the closest. Bitcoin and tech stocks follow next but with a time lag of around three months. Finally, the S&P 500, cyclicals, and commodities catch up with financial conditions.

Raoul Pal highlighted that if you overlay the price of Bitcoin against the global M2 (adjusted by 3 months to account for the lag), there is a 90% correlation.

More Liquidity On The Horizon?

Two things drive the global M2 money supply: the dollar and the global financial system.

Within the global financial system, governments and central banks are encouraging banks to buy debts as part of Basel IV and the overhaul of global bank capital requirements. Add the changes to the Statutory Liquidity Ratio (SLR) in the U.S., and bonds and debt are effectively being diverted into the banking system.

Banks then create more money using the debt as reserves. It’s just another way of debasing the currency and injecting liquidity.

The dollar is following the same trajectory as it did during the first Trump presidency. It’s collapsing.

As the dollar weakens, global exports and the global economy pick up.

In addition, central banks will begin to pump liquidity into the system because they all need to roll debt as part of the debt refinancing cycle.

The global M2 money supply is driven by the debt refinancing cycle, and global debt has an average maturity of four years.

That’s why the global M2 is so cyclical.

So what does that all mean for the bitcoin price?

We know from Raoul Pal’s work how Bitcoin reacts to liquidity.

Every time the global liquidity index breaks out, the price of Bitcoin follows. There is a 90% correlation.

Global M2 money supply is at all-time highs. That will translate into all-time highs for the bitcoin price.

While there will be corrections, which is expected, the bitcoin price directionally should be up and will likely outperform global M2 in the fourth quarter as FOMO kicks in.