Bitcoin’s Strong Correlation with Global Liquidity Surpasses Gold and Stocks
Bitcoin’s correlation with global liquidity has been a topic of interest for investors and analysts alike, especially as it continues to outshine traditional assets like gold and stocks. According to a recent report by venture capitalist Lyn Alden, Bitcoin’s movement in tandem with the M2 Index and on-chain data can provide valuable insights into market cycles.
The Purest Liquidity Barometer
The report highlights that Bitcoin has shown a strong correlation with global liquidity over the years, with the flagship cryptocurrency typically rising when liquidity expands and correcting when global liquidity shrinks. This unique characteristic makes Bitcoin the “purest liquidity barometer” among major asset classes.
A key finding of the report is that Bitcoin’s price exhibited a remarkably strong correlation of 0.94 with global liquidity between May 2013 and July 2024. This indicates a very strong positive relationship between Bitcoin and the M2 supply, which measures the global money supply encompassing cash in people’s physical savings, funds in bank accounts, and other short-term saving vehicles available in the market.
Comparative Analysis
When compared to other assets, Bitcoin maintains the highest average correlation with global liquidity over a rolling 12-month period, closely followed by gold. Stock indices show the next strongest correlations, while bond indices have the lowest correlation with global liquidity.
The report highlights that Bitcoin’s directional alignment with liquidity sets it apart from other traditional assets. In 83% of 12-month periods and 74% of 6-month periods, Bitcoin moved in the same direction as global liquidity, showcasing a consistency that outperforms other assets analyzed.
On-Chain Data Insights
The research suggests that global liquidity is a key driver of Bitcoin’s long-term price performance. For investors, understanding this relationship can be crucial in evaluating Bitcoin market cycles and forecasting future price movements.
However, the report also acknowledges that Bitcoin’s correlation with liquidity can break down during significant industry events or extreme market conditions. Instances such as the Mt. Gox hack and the “Crypto Credit Contagion” following the collapse of TerraLuna have been identified as events where the correlation weakened.
Supply-Side Trends
Supply-side trends also play a significant role in impacting Bitcoin’s correlation with liquidity. Metrics like the “Bitcoin 1+ Year HODL Wave” and the Market Value to Realized Value Z-Score (MVRV Z-score) can help identify periods when Bitcoin might deviate from its long-term correlation with global liquidity.
The wave of investors holding Bitcoin for over a year tends to shrink during bull markets as holders realize profits, and rises during crypto winters as they re-accumulate. Additionally, a low MVRV Z-score indicates that the market price could be at or slightly below the realized price, suggesting that Bitcoin may be undervalued.
Comprehensive Analysis
In conclusion, the report emphasizes the importance of combining the analysis of global liquidity with on-chain metrics like the MVRV Z-score to gain a more comprehensive understanding of Bitcoin’s price cycles. This approach can help identify periods when sentiment may override liquidity conditions, offering valuable insights for investors navigating the volatile cryptocurrency market.
Bitcoin’s strong correlation with global liquidity continues to surpass that of gold and stocks, making it a unique asset class that provides valuable indicators for market trends and price movements. As the cryptocurrency ecosystem evolves, understanding these correlations and incorporating them into investment strategies will be key for investors seeking to navigate the dynamic landscape of digital assets.
