How the Money Supply Influences Bitcoin’s Price

Bitcoin has experienced a 26% decline from its all-time high in this cycle, leading to a market atmosphere characterized by “extreme fear.” Nevertheless, trends in global liquidity provide a wider perspective, offering some comfort amid the chaos of the market.

In the current economic landscape, the money supply significantly influences asset valuations. This is particularly applicable to Bitcoin, which exhibits a long-term correlation of 0.94 with global liquidity. Evaluating global liquidity in conjunction with industry-specific developments and Bitcoin’s on-chain valuation metrics equips investors with critical insights that must not be ignored.

Bitcoin and Global Liquidity

Global liquidity encompasses the total availability of money and credit within the global financial system. It influences capital flows, investments, and asset prices, with central banks’ monetary policies and interest rates playing essential roles. Key institutions such as the Federal Reserve, European Central Bank (ECB), People’s Bank of China (PBoC), and Bank of Japan (BoJ) actively shape global liquidity dynamics.

A widely used gauge of global liquidity is Global M2, which includes cash, checking and savings deposits, money market accounts, and minor time deposits under $100,000, all measured in U.S. dollars. It serves as a valuable proxy for global liquidity, illustrating the total funds available for global spending, investing, and lending.

Bitcoin’s market price closely follows the patterns of global liquidity. The rationale is simple: an increase in available money typically drives asset prices higher. Risk assets, including Bitcoin, are particularly responsive to liquidity conditions, thriving in climates where investors are inclined to pursue risk.

Historically, Bitcoin bull markets have coincided with periods of swift global liquidity growth. The year-over-year growth of global M2 has shown a strong correlation with the price of Bitcoin, as indicated by data from Bitcoincounterflow.

Other Influencing Factors on Bitcoin’s Correlation with Liquidity

Although Bitcoin typically aligns with liquidity trends, its price motion is also contingent upon timing, Bitcoin-related events, and its inherent liquidity dynamics. In a study commissioned by Lyn Alden, Sam Callahan evaluated these elements.

Timing is Essential

Bitcoin shows a robust long-term correlation with liquidity, yet short-term shifts are shaped by specific market variables. An assessment of Bitcoin’s performance from May 2013 to July 2024 reveals a 0.94 correlation with global liquidity over the long-term. However, this correlation reduces to 0.51 when analyzed using a 12-month rolling average, and further declines to 0.36 over a six-month rolling period.

Disruptions in Correlation

Instances where Bitcoin’s 12-month rolling correlation with liquidity falters often align with major industry or global events. Events like the ICO bubble collapse, the COVID-19 market downturn, or the Terra/Luna crash—which Callahan describes as causing a crypto credit contagion—disrupted market conditions, leading to panic selloffs detached from liquidity trends.

Bitcoin’s Unique Liquidity Cycle

Bitcoin represents more than just an investment; it operates as a currency featuring its own liquidity cycles. It adheres to a four-year halving cycle, where the rewards given to miners for maintaining the network are halved. Although the decline in new supply is relatively minor, halvings tend to generate significant market enthusiasm, often driving prices into overbought conditions. At this juncture, long-term holders tend to profit from the rally by selling to new market participants. This trend has been evident in 2013, 2017, and 2021, when Bitcoin reached extreme valuations prior to experiencing swift corrections, followed by significant declines.

A key metric for monitoring Bitcoin’s valuation state is the Market Value to Realized Value (MVRV) ratio, which compares Bitcoin’s market price to the average on-chain purchase price. The MVRV Z-score enhances this analysis by considering historical volatility, presenting a clearer picture of valuation extremes. A high MVRV Z-score indicates that Bitcoin may be overvalued, possibly signalling a corrective phase, while a low score suggests potential accumulation opportunities due to undervaluation.

When overlaying the MVRV Z-score with Bitcoin’s 12-month rolling correlation to liquidity, a distinct pattern emerges: a sharp decline in the MVRV Z-score from high levels often corresponds with a weakening in Bitcoin’s correlation to liquidity. This implies that during periods of extreme valuation, internal market dynamics—such as profit-taking and panic sales—become more significant than wider liquidity conditions. Consequently, even in a conducive liquidity environment, an overvalued Bitcoin, indicated by the MVRV Z-score, could still encounter price corrections attributed to internal market forces.

What Does Global Liquidity Indicate About Bitcoin’s Future?

Bitcoin’s prospects remain optimistic in light of ongoing global liquidity growth. Since the beginning of 2025, global M2 (encompassing 21 major central banks) has surged from a local minimum of $102 trillion to $107 trillion by late February—a remarkable increase of 3.8%.

Traditionally, significant liquidity shifts take approximately 60 days before impacting Bitcoin’s price, suggesting we may witness Bitcoin hitting a low around April.

An additional substantial liquidity boost may be imminent. On February 25, the U.S. debt ceiling was raised by another $4 trillion. In China, the money market is still tight, despite extensive reverse repo actions by the PBoC. However, analysts at Citi have predicted potential rate and reserve requirement reductions in the latter half of 2025. In the Eurozone, declining inflation is fueling anticipations for ECB rate cuts.

Furthermore, Bitcoin’s current MVRV Z-score remains neutral, suggesting it is yet to enter overvalued territory. Even when accounting for declining cycle tops, the current overvaluation threshold is estimated to be just below 4, while Bitcoin’s MVRV Z-score is measured at 2, according to BitBo. This indicates substantial potential for price growth prior to reaching historical valuation extremes.