What if I told you that there is one macro force that has appeared before every major move Bitcoin has made in the last 10 years?
A macro variable that showed up before Bitcoin’s 5,000% rally from 2016 to 2017, again before the 1,000% surge from 2020 to 2021, and also right before the vicious 70% crashes in 2018 and 2022.
It’s called global liquidity.
And it’s flashing yet another major signal today telling us where Bitcoin could be by August of this year.
We can see global liquidity through the global M2 money supply.
This reflects the total liquidity provided by 20 of the world’s largest central banks.
Right now, it’s breaking out to the highest level on record.
This global liquidity is heavily influenced by what central banks do with interest rates.
When central banks cut rates, borrowing becomes cheaper.
That encourages lending and spending, leading to more money circulating in the financial system.
For example, the US money supply peaked in 2022 and began declining.
This perfectly coincided with the Fed raising rates and making borrowing more expensive.
But starting from August 2023, the Fed paused rate hikes and gradually shifted towards cuts.
US money supply also began rising since then and has recently hit new all-time highs.
This principle applies not just for the US but for central banks around the world
Today, global central banks are cutting rates at one of the fastest paces in history, with 64 rate cuts globally in just the last 6 months.
The last time there were these many cuts was in 2020 in response to the pandemic.
So how does this affect Bitcoin?
Well, when we put Bitcoin’s price on top of the global money supply, the relationship becomes quite clear.
Bitcoin tends to generally move in the same direction as global liquidity.
Take 2020 for example.
Following the pandemic, central banks responded with rate cuts leading to an explosion of money supply.
Bitcoin went from under $5,000 to nearly $70,000 within just a year.
On the flip side, in 2022, global liquidity fell as central banks raised rates.
That shift coincided with Bitcoin falling from $70,000 to $15,000.
So, when liquidity expands, Bitcoin and other risk assets rally
When it contracts, they tend to struggle
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Now, Bitcoin has a correlation coefficient of 0.51 with the global money supply.
A correlation coefficient measures how closely the movement of two variables track each other.
Hypothetically, a correlation of 1 would mean the two variables are doing exactly the same thing.
Whereas, a 0 correlation would mean no relationship at all.
Bitcoin’s 0.51 correlation with liquidity is the highest correlation out of all other financial assets including gold, the S&P 500, emerging markets, and treasury bonds.
It’s not perfect, but it’s a key factor influencing Bitcoin’s price.
And there’s a fundamental reason for that.
Bitcoin is not tied to economic fundamentals like earnings or cash flows.
It’s an asset that thrives when investors are seeking risk and chasing returns, something they do more of when global liquidity is abundant.
Since Bitcoin is globally accessible, it responds to capital flows around the world.
That makes Bitcoin more sensitive to global liquidity than most traditional assets
So how much of an impact could this have today?
Well, so far we’ve only talked about the absolute level of global M2 money supply
But what really matters for financial markets is the rate of change – how quickly the money supply is rising or falling.
Investors don’t just respond to where global liquidity is today, they respond to how fast it’s expanding or contracting.
This chart shows the year-over-year change in global liquidity.
When this chart is rising, it means liquidity is expanding.
Those periods tend to align with some of the strongest Bitcoin rallies historically.
Research shows that Bitcoin has an 8.95 sensitivity to changes in global liquidity.
This means for every 10% increase in global M2 growth, Bitcoin has historically climbed 90%.
That high sensitivity explains why Bitcoin performs extremely well when liquidity is rising and experiences tough bear markets when global capital tightens.
Zooming in, global liquidity has been expanding steadily over the last few weeks.
At first Bitcoin was not responding.
It stagnated around its all-time high.
This actually allowed us to take a position on Bitcoin at Bravos Research.
Since then, Bitcoin has begun to break out.
In our opinion this is just the beginning.
Now, there have been moments where the relationship broke down.
For example, during Covid-19 or the FTX collapse, the correlation briefly dropped into negative territory.
So this is the risk to our Bitcoin trade today that some event triggers a breakdown in the correlation, leading Bitcoin lower despite rising global liquidity.
But, if the relationship holds then what kind of move should we expect?
Well, when we plot Bitcoin’s price against global liquidity and shift the liquidity line forward by 3 months, something interesting happens.
Bitcoin doesn’t just follow the direction of liquidity, it tends to follow it with a lag.
This is a relationship we highlighted back in April when Bitcoin was trading around $80,000 and many were calling for a bear market.
But global money supply was telling us that Bitcoin would bottom and move higher.
That’s exactly what happened.
Today, if the relationship continues, global liquidity suggests Bitcoin could rally towards $170,000 by September.
Keep in mind though, Bitcoin’s correlation to global money supply sits at 0.51 not 1.
So, we take this as a range giving us an approximate target of $160,000 to $200,000 by year-end depending on how hot the crypto market gets.
This is why we currently have an active position on Bitcoin on our website.
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