Beginning
Today we explore how key general economic factors—global liquidity, interest rates, inflation, and Federal Open Market Committee (FOMC) announcements—affect Bitcoin price during a bull market. Using historical data from the beginning of 2014 to the present, we use statistical and econometric analysis to identify trends and correlations, provide insights into how these factors influence market behavior and inform 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 for stocks and Bitcoin obtained from financial databases.
FOMC Announcements, News: Archives 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 critical to a healthy economy. Increased liquidity drives asset prices higher as more money flows into the market, promoting fast and stable transactions. Periods of high liquidity increase trading volume and prices. Understanding these trends helps investors seize market opportunities and make informed decisions to maximize returns.
Liquidity is assessed through multiple indicators, including:
Money Market Funds: These funds typically consist of highly liquid, short-term securities and are a good indicator of available liquidity in the financial system. They reflect an institution's ability to meet its short-term obligations.
Source: Federal Reserve Economic Data
Bank Reserves: Reserves held by banks with central banks 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 a financial institution has sufficient high-quality liquid assets to cover its total net cash outflows within 30 days. It is an important indicator for assessing a bank's liquidity health.
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 assessment criteria we use is the ‘M2’ money supply. M2 includes all the cash people have on hand and in bank accounts. It covers physical currency, checking accounts, savings accounts, and other near-monetary assets. Tracking M2 helps us understand overall liquidity in the economy and understand how much money is available for spending and investment.
Historically, peaks in global M2 growth coincide with Bitcoin bull markets. What matters is not just the amount of money in circulation, but also the rate of change in the money supply. Bitcoin’s volatility tends to coincide with changes in M2 momentum. Monitoring M2 becomes even more important during bull markets, as increased liquidity typically drives markets higher, making more money available for investment, thus pushing asset prices higher.
Source: MacroMicro
The bull run in the cryptocurrency industry 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 Bitcoin’s novelty and small market capitalization, making it more prone to significant price swings.
Mainstream Popularity Bull Market (2015-2017)
M2 Growth: After financial turmoil, low interest rates and increased money supply persist.
Bitcoin Reaction: Bitcoin rallied from $200 to $19,000 as major streaming and institutional interest further fueled its demand amid growing liquidity.
Bull Market in the New Digital Era (2020-2021)
M2 Growth: COVID-19 pandemic triggers unprecedented monetary easing and stimulus measures, showing Bitcoin reaction: Bitcoin price surges from $10,000 to $64,000 as investors seek alternatives to fiat currencies, hurt by inflation and devaluation of traditional currencies driven by concerns.
Recovery and Innovation (2024)
M2 Growth: Overall liquidity is trending lower due to higher interest rates due to post-COVID efforts to curb inflation. Liquidity has increased slightly since the start 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 that Bitcoin has reached new highs without a significant surge in liquidity, indicating the unprecedented maturity of the Bitcoin market.
However, the situation is different with altcoins. As trader Benjamin Cowen noted, the Alts/Bitcoin pair is already tracking global net liquidity estimates. We may need to see an increase in overall liquidity for altcoins to enter the growth phase.
Image source: TradingView
Analyzing further, trader Nik shows that the dominance of Bitcoin, USDT, and USDC is inversely proportional to global currency velocity. This means that when 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 stablecoins and Bitcoin dominance.
Image source: TradingView
We recommend analyzing overall economic policy to gain insights into future liquidity trends. Monitor the global M2 money supply and understand liquidity changes and their impact on asset prices. In addition, study market sentiment and attention flow 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. Let’s see if Bitcoin’s sensitivity to central bank decisions changes as it becomes more popular and integrated into the financial system.
An interesting study shows that Bitcoin is designed to be independent of monetary policy, but actually responds to decisions by the Federal Reserve and the European Central Bank (ECB), with effects that change over time.
Prior to 2013, monetary shocks from the Federal Reserve significantly reduced the price of Bitcoin. 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 ECB’s de-inflationary shock consistently lowers Bitcoin prices, suggesting that Bitcoin behaves like digital gold in the face of ECB decisions.
Source: Springer
Central bank information shocks have different impacts on Bitcoin in the United States and the European Union. Positive shocks from the Fed reduce Bitcoin prices, while positive shocks from the ECB typically increase Bitcoin prices, peaking in early 2018. Initially, Bitcoin was immune to these economic prospects.
The chart below shows that Bitcoin prices typically adjust in the first few months after a shock, with similar effects after 6 and 18 months. Since 2016, the effects of ECB shock are longer-lasting, with responses stronger after 18 months than after the first 6 months.
Source: PANews
This study only included data through 2019. However, starting in 2020, Bitcoin’s actual volatility around FOMC announcements began to rise, especially after the onset of the COVID-19 pandemic in late 2020. Bitcoin’s price reacted almost immediately to the Fed’s tightening, suggesting a closer and more direct correlation to monetary policy decisions. Bitcoin’s valuation response was qualitatively similar to other risk assets such as equities, FX, and gold, but Quantitatively stronger.
Even in the latest CPI release, we observed increased sensitivity of Bitcoin valuation to inflationary news in a post-2020 high-inflation environment.
In fact, Bitcoin showed an immediate reaction to the latest CPI announcement. When the unexpected result of US inflation of 0.0% (month-on-month) was announced in May, Bitcoin prices rose along with most other assets. However, this initial celebration was quickly corrected when the FOMC attempted to dampen liquidity expectations.
Image source: TradingView
in conclusion
Bitcoin has attracted significant interest from investors and academics as a potential hedge against inflation. Bitcoin was initially valued for its scarcity and decentralized nature, viewed by some as a safeguard against inflation. However, empirical studies have 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. Since 2020, however, Bitcoin prices have begun to fall immediately following the Fed’s tightening, suggesting a closer and more direct correlation to monetary policy decisions. The shift highlights Bitcoin’s increased sensitivity to central bank action.
Evidence suggests 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 linked to global liquidity conditions, driven by central bank policies, investor behavior and institutional investment trends.
These findings suggest that initial demand for Bitcoin was driven more by its use as borderless, decentralized digital cash than as an inflation hedge. However, post-2020, Bitcoin prices fell significantly following the Fed’s tightening, highlighting speculative motivations as well as broader investor base and general acceptance.
There are no significant changes to market forecasts for the upcoming CPI release (Thursday, July 11, 2024), with the following expectations.
Note that the Truflation ratio shown above provides additional insights that may be relevant if actual results are again lower than expected.
Image source: Truflation.com
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reproduced with permission from: "PANews"
Original author: 0xGreythorn
