Bitcoin's (BTC) price action continues to attract attention as analysts consider its correlation with global M2 money supply.
A notable forecast suggests the pioneering cryptocurrency may be at the peak of a 20-25% correction, aligning with the recent contraction in M2 liquidity.
Why Bitcoin may be due for a 25% correction
The head of growth at Bitcoin custodian Theya, Joe Consorti, emphasized that Bitcoin closely tracks global M2 with a lag of about 70 days since September 2023. In a recent post on X (formerly Twitter), Consorti warned of the potential for BTC to drop 25% as it continues to track global M2.
"I don't want to alarm anyone, but if this trend continues, Bitcoin could experience a 20-25% correction," Consorti said.
His analysis places M2 data 70 days ahead of Bitcoin's price, indicating a concerning trajectory as global liquidity tightens. Consorti's observations come against a backdrop of rare deviations from M2 trends, historically correlating with Bitcoin's price.
Bitcoin's correlation (orange) with Global M2 (white). Source: X/Twitter
He argued that past discrepancies, such as during the FTX collapse in 2022, were due to specific market events. Looking back, on September 30, Consorti predicted Bitcoin could hit $90,000 by year-end if it continued to reflect M2 trends. That forecast played out accurately during BTC's recent rally, reinforcing his credibility.
A proponent of this correlation, user Joseph Scioscia, reiterated that Bitcoin acts as a reliable proxy for M2 money supply trends. He advised investors to adopt a long-term dollar-cost averaging (DCA) strategy, citing BTC's historical resilience.
"Bitcoin is the best representation of M2 money supply. The trend in M2 shows the potential direction of BTC, especially with Bitcoin's approximately 70-day lag after M2. DCA into Bitcoin and apply a long-term strategy," Scioscia said.
However, skepticism remains. A user on X known as Spicez criticized the focus on short-term data. They argued that a broader five-year chart would provide deeper insights into Bitcoin's behavior during election cycles and post-halving periods.
"It's great to see this chart over the past 5 years. It will give us a signal about BTC's behavior towards M2 during the election cycle and how it performs after the last halving. This 2-year chart doesn't tell us much," Spicez challenged.
The important link between M2 money supply and BTC
Global M2 supply measures the total liquidity in the economy, including checking accounts, savings accounts, and other liquid assets that can quickly be converted to cash. It has been a major driver of Bitcoin's price volatility.
Risk assets, including Bitcoin, often correlate with increased liquidity. The relationship between Bitcoin's price and M2 expansion reflects market sentiment and broader economic conditions.
Higher M2 expansion indicates loose monetary policy and increased money supply, which typically boosts risk assets like cryptocurrencies. Historically, increases in M2 correlate with Bitcoin's price uptrend as liquidity flows into risk assets. Conversely, declines often signal an impending correction.
In a recent analysis, BeInCrypto reiterated this link, suggesting that global liquidity could help Bitcoin reach $100,000. As reported, factors such as the Bitcoin halving in 2024 and broader macroeconomic recovery often act as headwinds to BTC's price.
Growing interest in Bitcoin ETFs (exchange-traded funds), particularly from institutions like BlackRock, could counteract M2-related pressures. Structural buying from ETF funds, along with corporate buybacks, could provide a cushion against liquidity-driven sell-offs.
"It [Bitcoin] could weather this 2-month M2 deflation thanks to structural ETF capital flows + corporate buying pressure," Consorti added.
While Bitcoin's price faces potential headwinds from the contraction of global liquidity, the market remains divided on its next move. Structural capital flows and long-term applied strategies could mitigate any downside. However, traders should prepare for volatility as macroeconomic factors unfold this week.
BTC price performance. Source: BeInCrypto
At the time of writing, Bitcoin is trading at $94,395. BeInCrypto data shows it has dropped 3.37% since Tuesday's open.