Last Friday evening, the Bitcoin price scratched the USD 100,000 mark after a phenomenal rise since the beginning of the month. On the crypto exchange Coinbase, the high was USD 99,860 per BTC.
However, after the Bitcoin price weakened last weekend, it dropped significantly at the start of the week - partly due to the usual liquidation cascades on the crypto market, which can amplify price movements in one direction or another.
Could this be due to the current decline in the global money supply, with which BTC - with a slight time lag - has correlated very strongly in recent weeks?
Global money supply and Bitcoin
Over longer-term periods, Bitcoin has shown that it reacts very sensitively to global liquidity or the global money supply. For this reason, some market participants who trade on the basis of macroeconomic variables bet on Bitcoin in particular when they assume that the amount of money in circulation in the major economies will increase in the medium to long term.
Due to the ever-increasing national debt in the USA and other nations, it is reasonable to assume that the relevant central banks will only have one option in the short or long term - to lower interest rates and open the money floodgates so that the debt can be devalued and the states can borrow money again at better conditions.
In addition to the ever-increasing adoption of Bitcoin, the main driver of the Bitcoin price is likely to be the liquidity cycle that is still to come - also in the perception of many major market participants, who are certainly aware of the high correlation between Bitcoin and the global money supply.
However, it is particularly interesting if you superimpose the Bitcoin chart with that of the global money supply with a time lag of ten weeks. This shows that a very high correlation has prevailed over the past twelve months, with the swings in the Bitcoin price being much stronger in percentage terms.
However, as global liquidity has fallen slightly again in recent weeks, it is reasonable to assume that the Bitcoin price could now correct more sharply - according to this chart to a level of almost USD 70,000, which would mean a price drop of around 30% from the all-time high. However, a correction of this magnitude is the norm rather than the exception, even in Bitcoin bull markets.
However, this correlation has not always been as high as in recent months. For example, global liquidity fell significantly in the third quarter of 2023, while the Bitcoin price rose sharply - with the same ten-week time lag.
In addition, the global money supply has only decreased by around 3% - from 108 to 104.79 trillion US dollars. This small decline is due to the current fall in the amount of money in circulation in the Japanese yen. In the other currency areas, the money supply has remained constant or increased slightly.
Global liquidity is made up of the money supply of the following currencies: US dollar, euro, British pound, Chinese yuan and Japanese yen.
Outlook for global liquidity
It is impossible to say with certainty whether the small setback in global liquidity will result in a further fall in the price of Bitcoin. How the Bitcoin price ultimately behaves depends on a variety of factors - even if the global money supply appears to be a main price driver in the long term.
Even if the chart with the ten-week time lag were to remain valid, this would be no reason to assume that the Bitcoin bull market will now come to an end. In view of the interest rate turnaround by the major central banks, particularly the Federal Reserve, the monetary policy environment is likely to improve further in the coming weeks and months - even if the Bank of Japan has raised interest rates this year for the first time in almost two decades.
As long as there is no imminent major economic crisis in which loans default and therefore the money supply falls or significantly fewer new loans are granted, it can be assumed that global liquidity will be significantly higher in the coming year. And even if a major recession were to unfold, central banks will respond in the best way they know how, namely by cutting interest rates and buying bonds with freshly created money, which sooner or later is likely to boost the global money supply - and therefore the price of Bitcoin - all the more.
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