How Money Supply Shapes BTC’s Price

Bitcoin has dropped 26% from this cycle’s all-time high, pushing market sentiment into “extreme fear.” However, global liquidity trends provide a broader perspective, offering reassurance amid market volatility.

Indeed, in today’s economic environment, the money supply plays a big role in shaping asset prices. This is especially true for bitcoin, which maintains a 0.94 correlation with global liquidity over the long term. Analyzing global liquidity alongside industry-specific events and bitcoin’s on-chain valuation metrics gives investors a valuable insight they shouldn’t overlook.

Bitcoin and Global Liquidity

Global liquidity refers to the overall availability of money and credit across the international financial system. It affects capital flows, investment, and asset prices, with central banks playing a crucial role through interest rates and monetary policy. The Federal Reserve, European Central Bank (ECB), People’s Bank of China (PBoC), and Bank of Japan (BoJ) are key institutions shaping global liquidity conditions.

A common measure of global liquidity is Global M2. It includes cash, checking and savings deposits, money market accounts, and smaller time deposits under $100,000, all denominated in U.S. dollars. It serves as a useful proxy for global liquidity, showing the total money readily available for spending, investing, and lending on a global scale.

Bitcoin’s price closely follows global liquidity trends. The logic is straightforward: when there is more money available, asset prices tend to rise. Risk assets, including bitcoin, are particularly sensitive to liquidity conditions, thriving in environments where investors adopt a risk-on strategy.

Historically, Bitcoin bull markets have aligned with periods of rapid global liquidity expansion. The year-over-year growth rate of global M2 has demonstrated the strongest correlation with Bitcoin’s price, as shown by data from Bitcoincounterflow.

Additional Factors Influencing Bitcoin’s Correlation with Liquidity

While bitcoin generally follows liquidity trends, its price movements also depend on timing, bitcoin-specific events, and its own internal liquidity dynamics. In a study commissioned by Lyn Alden, Sam Callahan analyzed these factors.

Timing Matters

Bitcoin maintains a strong long-term correlation with liquidity, with short-term variations influenced by specific market factors. An analysis of bitcoin’s performance between May 2013 and July 2024 shows a 0.94 correlation with global liquidity over the long term. However, when measured using a 12-month rolling correlation, this drops to 0.51, and over a six-month rolling window, it falls further to 0.36.

Breakdowns In Correlation

Periods where Bitcoin’s 12-month rolling correlation with liquidity weakens often coincide with significant industry or global events. The ICO bubble pop, the COVID-19 sell-off, or the Terra/Luna collapse (which triggered what Callahan calls a crypto credit contagion) disrupted market dynamics, leading to fear-driven selloffs unrelated to liquidity trends.

Bitcoin’s Own Liquidity Cycle

Bitcoin is more than just an asset; it functions as money, with its own internal liquidity cycles. It follows a four-year halving cycle, where miners’ rewards for securing the network are cut in half. While the reduction in new supply is relatively small, halvings tend to ignite market-wide enthusiasm, often pushing prices into overbought territory. At that point, long-term holders capitalize on the rally by selling to new entrants. This pattern played out in 2013, 2017, and 2021, when bitcoin hit extreme valuations before experiencing sharp corrections, followed by sharp declines.

A key metric for tracking the state of bitcoin’s valuation is the Market Value to Realized Value (MVRV) ratio. It compares bitcoin’s market price to the average on-chain acquisition price. The MVRV Z-score refines this measure by accounting for historical volatility, making it a more precise indicator of valuation extremes. A high MVRV Z-score suggests bitcoin is overbought, signaling a potential correction, while a low score indicates undervaluation and accumulation opportunities.

Overlaying the MVRV Z-score with bitcoin’s 12-month rolling correlation to liquidity reveals a clear pattern: when the MVRV Z-score drops sharply from elevated levels, bitcoin’s correlation with liquidity tends to weaken. This suggests that during extreme valuations, internal market dynamics—such as profit-taking and panic selling—is more important that broader liquidity conditions. This means that even in a favorable liquidity environment, an overvalued bitcoin, as signaled by the MVRV Z-score, may still face price corrections due to internal market forces.

What Does Global Liquidity Suggest About Bitcoin’s Future?

Bitcoin’s outlook remains bullish amid continued global liquidity expansion. Since the start of 2025, global M2 (covering 21 major central banks) has grown from the local bottom of $102 trillion to $107 trillion by the end of February —a notable 3.8% increase.

Historically, major liquidity shifts have taken about 60 days to impact bitcoin’s price. This means that we might see bitcoin bottoming out by April.

Also, a substantial liquidity injection may be forthcoming. On February 25, the U.S. debt ceiling was raised by another $4 trillion. The Chinese money market remains tight despite PBoC’s extensive reverse repo operations. However, Citi analysts expected rate and reserve requirement ratio cuts in the second part of 2025. In the Eurozone, falling inflation is increasing expectations of ECB rate cuts.

Additionally, Bitcoin’s current MVRV Z-score remains neutral, indicating that it is not yet in overvalued territory. Even adjusting for declining cycle peaks, the current overvaluation threshold is estimated to be just below 4, while Bitcoin’s MVRV Z-score sits at 2, according to BitBo. This suggests room for further price appreciation before reaching historical valuation extremes.