Introduction
Today we explore how key macroeconomic factors - global liquidity, interest rates, inflation, and Federal Open Market Committee (FOMC) announcements - affect Bitcoin prices during bull markets. Using historical data from the beginning of 2014 to date, we use statistical and econometric analysis to identify trends and correlations, providing insights into how these factors affect market behavior and provide investment strategies.
data collection
We collect the following data from reliable sources:
Interest rates: US Federal Reserve Economic Data (FRED).
Inflation: U.S. Bureau of Labor Statistics (BLS).
Market Prices: Historical prices of stocks and Bitcoin obtained from financial databases.
FOMC Announcements/News: Archive of Federal Reserve announcements and news, and U.S. Treasury press releases.
Global market liquidity
Liquidity, the availability of cash and easily traded assets, is essential to a healthy economy. Increased liquidity drives asset prices higher as more money flows into the market, facilitating fast and stable transactions. Trading volumes and prices rise during periods of high liquidity. Understanding these trends helps investors seize market opportunities and make smart decisions to maximize returns.
Liquidity is measured using a number of metrics, including:
Money Market Funds: These funds are typically composed of highly liquid, short-term securities and are a good indicator of available liquidity in the financial system. They reflect the ability of institutions to meet their short-term obligations.
Source: Federal Reserve Economic Data
Bank Reserves: The reserves held by banks at the central bank also indicate liquidity. Higher reserves mean there is more liquidity in the banking system available to support lending and investment.
Source: Federal Reserve Economic Data
Liquidity Coverage Ratio: This regulatory standard ensures that financial institutions have sufficient high-quality liquid assets to cover their total net cash outflows within 30 days. It is an important indicator for measuring the liquidity health of banks.
Source: Investopedia
Turnover Ratios: Turnover ratios for stocks and bonds indicate market liquidity. A higher turnover rate indicates a more liquid market, where assets can be bought and sold quickly without significant price changes.
Source: Investopedia
However, one of the main measures we use is the âM2â money supply. M2 includes all the cash people have on hand and in their bank accounts. It covers physical currency, checking accounts, savings accounts, and other near-monetary assets. Tracking M2 helps us understand the overall liquidity in the economy, and the amount of money available for spending and investment.
Historically, peaks in global M2 growth have coincided with Bitcoin bull markets. Itâs not just the amount of money in circulation that matters, but also the rate of change in money supply. Bitcoinâs volatility tends to coincide with changes in M2 momentum. During bull markets, monitoring M2 becomes particularly important because increased liquidity typically drives markets higher, making more money available for investment, which drives up asset prices.
Source: MacroMicro
The bull run in the cryptocurrency space provides investors with significant opportunities. Here are some notable bull runs in crypto history:
Source: Greythorn
As shown in the figure, the global liquidity cycle shows obvious cyclicality.
Source: Global Macro Investor
Historically, as mentioned previously, there has been a significant correlation between global M2 money supply growth and Bitcoin bull runs.
Source: MacroMicro
The first bull market (2011-2013)
M2 growth: During the European financial crisis and the Cyprus banking crisis, central banks increased liquidity to stabilize the economy.
Bitcoin Reaction: Bitcoin price surged from $2.93 to $329 as liquidity surged, reflecting increased demand for non-traditional financial assets. However, this increase has been primarily driven by Bitcoinâs novelty and small market capitalization, making it more prone to significant price swings.
Mainstream Popularity Bull Market (2015-2017)
M2 growth: Following the financial turmoil, low interest rates and increased money supply continued.
Bitcoin Reaction: Bitcoin rallied from $200 to $19,000, with mainstream media and institutional interest further fueling demand amid growing liquidity.
New Digital Era Bull Market (2020-2021)
M2 growth: The COVID-19 pandemic triggered unprecedented monetary easing and stimulus measures, significantly increasing the M2 money supply.
Bitcoin Reaction: Bitcoin price surged from $10,000 to $64,000 as investors sought alternatives to fiat currencies, driven by concerns about inflation and the debasement of traditional currencies.
Recovery and Innovation (2024)
M2 Growth: Overall liquidity is trending down due to post-COVID efforts to curb inflation, raising interest rates. Liquidity has risen slightly since the beginning of 2023, but remains modest compared to previous cycles.
Bitcoin Reaction: In 2024, Bitcoin hit an all-time high, rising from $25,000 to $85,000. This surge comes ahead of the next halving event, despite high interest rates. What is unique about this cycle is that it is the first time Bitcoin has reached new highs without a significant surge in liquidity, indicating the unprecedented maturity of the Bitcoin market.
However, the situation is different for altcoins. As trader Benjamin Cowen pointed out, the Alts/BTC pair is already tracking global net liquidity estimates. We may need to see an increase in overall liquidity for altcoins to enter a growth phase.
Source: TradingView
Further analysis, trader Nik shows that the dominance of BTC, USDT, and USDC is inversely proportional to the global money velocity. This means that when the money supply grows faster than GDP, financialization increases, leading to asset bubbles and lower Bitcoin dominance. Conversely, if GDP grows faster than the money supply, financialization decreases, leading to higher stablecoin and Bitcoin dominance.
Source: TradingView
We recommend analyzing macroeconomic policies to gain insights into future liquidity trends. Monitor global M2 money supply to understand liquidity changes and their impact on asset prices. In addition, study market sentiment and attention flows to predict and position market changes in advance.
Interest rates and inflation: insights from FRED data and FOMC announcements
Although Bitcoin is decentralized, it displays significant volatility around monetary policy events, reacting to changes in interest rates and the economic outlook. Letâs see if Bitcoinâs sensitivity to central bank decisions changes as it becomes more popular and integrated into the financial system.
Bitcoin, designed to be independent of monetary policy, actually responds to decisions made by the Federal Reserve and the European Central Bank (ECB), with effects varying over time, an interesting study shows.
Prior to 2013, the Fedâs monetary shocks significantly reduced Bitcoin prices. However, after 2013, these shocks began to drive Bitcoin prices higher, indicating a change in the market's perception of Bitcoin. At the same time, the ECBâs disinflationary shocks consistently reduce Bitcoin prices, indicating that Bitcoin behaves like digital gold in the face of ECB decisions.
Source: Springer
Central bank information shocks affect Bitcoin differently in the US and the EU. Positive shocks from the Fed reduce Bitcoin prices, while positive shocks from the ECB generally increase Bitcoin prices, peaking in early 2018. Initially, Bitcoin is unaffected by these economic outlooks.
The chart below shows that Bitcoin prices typically adjust within the first few months after a shock, with similar effects after 6 and 18 months. Since 2016, the effects of the ECB shock have been more persistent, with a stronger reaction after 18 months than in the initial 6 months.
This study only includes data through 2019. However, starting in 2020, Bitcoin's realized volatility around FOMC announcements began to rise, especially after the outbreak of the COVID-19 pandemic in late 2020. Bitcoin prices reacted almost immediately to Fed tightening, indicating a closer and more direct correlation with monetary policy decisions, and Bitcoin's valuation response is qualitatively similar to other risk assets such as stocks, foreign exchange, and gold, but quantitatively stronger.
Even with the latest CPI release, we observe an increased sensitivity of Bitcoin valuation to inflation news in a high inflation environment post-2020.
In fact, Bitcoin showed an immediate reaction during the most recent CPI announcement. When the unexpected result of 0.0% (month-over-month) US inflation for May was released, Bitcoin price rose along with most other assets. However, this initial celebration was corrected when the FOMC tried to curb liquidity expectations.
Source: TradingView
in conclusion
Bitcoin has attracted great interest from investors and academics as a potential hedge against inflation. Bitcoin was initially valued for its scarcity and decentralized nature, and is seen by some as a safeguard against inflation. However, empirical research has yielded mixed results on its effectiveness in this role.
Initially, Bitcoin prices did not react significantly to monetary policy announcements. Until 2019, it often took months for any reaction to show up. However, since 2020, Bitcoin prices have started to fall immediately after the Fed tightened, indicating a closer and more direct correlation with monetary policy decisions. The shift highlights Bitcoinâs increased sensitivity to central bank action.
Evidence suggests that the relationship between Bitcoin and inflation is complex and evolving, influenced by market maturity and broader economic conditions. However, Bitcoin's price dynamics are closely tied to global liquidity conditions, driven by central bank policies, investor behavior, and institutional investment trends.
These findings suggest that initial demand for Bitcoin was more due to its use as a borderless, decentralized digital cash than as an inflation hedge. However, after 2020, Bitcoin prices fell sharply after the Fed tightened, highlighting speculative motives as well as a broader investor base and general acceptance.
For the upcoming CPI release (Thursday, July 11, 2024), there are no significant changes in market forecasts, and the expectations are as follows.
Note that the Truflation Ratio shown above provides additional insight and may be relevant if actual results again fall short of expectations.
Source: Truflation.com
