Everything About the Correlation Between Global M2 Money Supply and Bitcoin

U.S. M2 Money Supply Reaches All-Time High

In recent months, the U.S. M2 money supply reached a historic peak of $21.94 trillion, representing a 4.5% increase compared to the previous year and marking 19 consecutive months of growth. This sustained expansion of monetary supply has drawn significant attention from cryptocurrency analysts and market observers.

Cryptocurrency analyst Colin noted that "Bitcoin's price movement follows the M2 upward curve based on a 68-76 day lag model." This observation has led to predictions that Bitcoin could potentially surpass $150,000 in the coming months, though such forecasts should be viewed as analytical projections rather than certainties.

Another prominent cryptocurrency analyst, Crypto Oris, predicted that "as global M2 money supply has reached new highs, Bitcoin's next price target could be around $170,000." These projections underscore the growing interest in understanding the relationship between monetary expansion and cryptocurrency valuations.

What Is Global M2 Money Supply?

Global M2 money supply represents the total amount of money circulating worldwide that is readily available for spending or investment. This metric is crucial for understanding economic liquidity and its potential impact on various asset classes, including cryptocurrencies.

M2 money supply measures the size of highly liquid assets that people can immediately consume or convert into investments. It serves as a key indicator of economic health and monetary policy effectiveness. Understanding M2 requires familiarity with the broader monetary classification system:

Classification and Definition:

• M0: Cash Currency - Physical banknotes and coins actually circulating in the market. This represents the most basic form of money that people can hold and use directly.
• M1: Narrow Money - M0 plus demand deposits. This includes checking accounts and other deposits that can be withdrawn on demand without notice.
• M2: Broad Money - M1 plus savings deposits and short-term time deposits. This broader measure includes money that may require some notice for withdrawal but remains relatively liquid.
• M3: Very Broad Money - M2 plus large deposits and institutional short-term financial instruments. This represents the widest measure of money supply, including less liquid but still significant monetary assets.

The Federal Reserve System, European Central Bank, People's Bank of China, and Bank of Japan play pivotal roles in determining the scale of M2 through their monetary policies and regulatory frameworks. These institutions influence M2 through various mechanisms including interest rate adjustments, reserve requirements, and quantitative easing programs.

Why Track Global M2 Money Supply?

Correlation with Inflation

When M2 money supply increases rapidly, it can lead to an excess of money in circulation, potentially triggering price increases and inflation. This relationship is fundamental to monetary economics and has been observed across various economic cycles.

The mechanism works as follows: when more money chases the same amount of goods and services, prices tend to rise. Conversely, when M2 growth rate is low, economic activity may contract as less money is available for transactions and investments. This delicate balance makes M2 a critical indicator for both policymakers and investors.

Correlation with Asset Markets

As M2 money supply increases, excess liquidity often flows into asset markets such as stocks, real estate, and cryptocurrencies, potentially inducing bubbles or rapid price appreciation. This phenomenon has been particularly evident in recent years across multiple asset classes.

The flow of liquidity into assets occurs because investors seek returns on their capital. When traditional savings accounts offer minimal returns due to low interest rates, investors often turn to alternative assets. Cryptocurrencies, particularly Bitcoin, have emerged as an attractive destination for this excess liquidity, given their potential for high returns and their perceived role as inflation hedges.

Barometer of Economic Stimulus Measures

When central banks lower benchmark interest rates and implement quantitative easing, market liquidity increases significantly. M2 growth becomes an important metric for gauging the effectiveness of these policy measures.

Central banks use M2 data to assess whether their policies are achieving desired outcomes. A rapid increase in M2 might indicate successful monetary stimulus, while stagnant M2 growth could suggest that policy measures are not effectively reaching the real economy. For cryptocurrency investors, understanding these dynamics helps in anticipating potential market movements driven by monetary policy changes.

Where to View M2 Money Supply and Bitcoin Charts

Several platforms provide comprehensive data visualization tools for tracking the relationship between M2 money supply and Bitcoin prices:

• Bitcoin Counterflow: Compares annual growth rates of M2 from 21 central banks worldwide with Bitcoin prices. This platform offers a comprehensive global perspective on monetary expansion and its correlation with cryptocurrency valuations.

• StreetStats: Provides global M2 money supply data based on M2 information from the United States, Eurozone, China, and Japan. This service aggregates data from the world's largest economies to create a holistic view of global liquidity.

• Bitcoin Magazine Pro: Tracks global M2 money supply growth rates from major central banks alongside Bitcoin prices. This platform is particularly useful for identifying potential lag patterns between M2 changes and Bitcoin price movements.

• BGeometrics: Compares M2 growth rates from 21 central banks worldwide with Bitcoin prices. This tool offers detailed analytical features for examining historical correlations and identifying potential future trends.

Correlation Between Bitcoin and M2 Money Supply

The 68-76 Day Lag Model

One of the most discussed theories in cryptocurrency analysis suggests that changes in M2 money supply do not immediately reflect in Bitcoin prices. Instead, there appears to be a lag of approximately 2 to 2.5 months (68-76 days) before M2 changes significantly impact Bitcoin valuations.

Reasons for the Time Lag:

• Time for Capital Flow: The process of converting increased M2 into actual investments requires time. Money must first enter the banking system, then be allocated by institutional and retail investors, and finally flow into cryptocurrency markets through various channels.

• Information Reflection Time: There exists a natural delay between the release of economic indicators and subsequent investor action. Market participants need time to analyze data, formulate strategies, and execute trades based on their interpretations.

• Psychological Factors: Investor psychology and sentiment take time to shift and reflect in the market. Even when data suggests a particular trend, behavioral economics shows that market participants often exhibit delayed reactions due to cognitive biases and risk assessment processes.

Important Caveat: This model is a reference indicator based on historical data and should not be considered an absolute law that predicts outcomes with 100% certainty. Market dynamics are complex and influenced by numerous factors beyond M2 money supply alone.

M2 Surge and Bitcoin Rise After the Pandemic

During the COVID-19 pandemic, the U.S. government implemented massive fiscal policies, directly distributing cash to citizens. Simultaneously, the Federal Reserve lowered benchmark interest rates to near-zero levels and executed unprecedented quantitative easing programs.

In the year following the pandemic's onset, U.S. M2 increased by over $4 trillion, recording the highest annual growth rate since 1943. This extraordinary monetary expansion had profound implications for asset markets across the board.

During the same period, Bitcoin started around $7,000 and surpassed $30,000 by year-end, representing more than a fourfold increase. This dramatic appreciation coincided with the massive expansion of M2, lending credence to theories about the correlation between monetary supply and cryptocurrency valuations.

The pandemic period demonstrated how rapidly expanding money supply could drive significant capital flows into alternative assets. As traditional investment vehicles offered diminishing returns in a low-interest-rate environment, investors increasingly turned to cryptocurrencies as potential stores of value and growth opportunities.

Narrative as an Inflation Hedge Asset

Bitcoin's emergence as a new "digital gold" stems from several fundamental characteristics that distinguish it from traditional fiat currencies:

• Fixed Supply: Bitcoin has a fixed total issuance of 21 million coins, making supply expansion impossible. This scarcity is programmed into the protocol and cannot be altered, providing a stark contrast to fiat currencies.

• Unlimited Fiat Expansion: M2 can increase indefinitely according to government fiscal policies and central bank monetary policies. This unlimited expansion potential creates concerns about currency debasement and purchasing power erosion.

• Hedge Against Currency Dilution: Bitcoin is increasingly viewed as a defense mechanism against the dilution of fiat currencies. As central banks expand money supply, Bitcoin's fixed supply makes it an attractive alternative for preserving value.

This narrative has gained particular traction among institutional investors and high-net-worth individuals seeking to protect their wealth from potential inflation resulting from expansionary monetary policies. The "digital gold" comparison emphasizes Bitcoin's potential role as a store of value in an era of unprecedented monetary expansion.

Statistical Correlation Analysis

From May 2013 to July of the following year, the correlation between Bitcoin and global liquidity measured 0.94, indicating an extremely strong positive relationship. This high correlation suggests that over extended periods, Bitcoin prices tend to move in tandem with global money supply.

However, when measuring correlation over shorter timeframes, the relationship appears less consistent. The 12-month rolling correlation measured 0.51, while the 6-month rolling correlation showed only 0.36. This variation in correlation strength across different timeframes highlights the complexity of the relationship.

These statistical findings suggest that while a long-term correlation exists between M2 and Bitcoin, short-term price movements are influenced by numerous other factors including regulatory developments, technological innovations, market sentiment, and geopolitical events. Investors should therefore consider M2 trends as one of many factors in their analysis rather than a sole determinant of Bitcoin price movements.

Why M2 Has Garnered Attention: Events and Context

1970s-1980s: Stagflation and the Rise of Monetarism

During the 1970s and 1980s, the United States faced stagflation—a challenging economic condition characterized by simultaneous economic stagnation and high inflation. This unprecedented situation defied conventional economic wisdom and demanded new policy approaches.

In response to this crisis, monetarists led by economist Milton Friedman argued that controlling M2 money supply itself was key to price stability. This school of thought emphasized the relationship between money supply and inflation, advocating for strict control of monetary growth rates.

In 1979, Federal Reserve Chairman Paul Volcker implemented aggressive interest rate hikes to combat inflation. While this policy successfully tamed inflation, it also plunged the U.S. economy into severe recession with soaring unemployment rates. This period demonstrated both the power and the potential costs of using monetary policy to control inflation through M2 management.

The lessons learned during this era continue to influence monetary policy discussions and highlight the delicate balance central banks must maintain between controlling inflation and supporting economic growth.

2008 Global Financial Crisis: Combining M2 and Quantitative Easing

The collapse of the U.S. housing bubble triggered a cascade of failures among major financial institutions, threatening the entire global financial system. In response, the Federal Reserve lowered interest rates to 0% and introduced quantitative easing, purchasing massive amounts of government bonds and mortgage-backed securities.

This quantitative easing policy led to a sharp increase in M2 money supply, fundamentally changing how markets understood the relationship between monetary policy and asset prices. The widespread recognition that "when M2 increases, asset markets respond before the real economy" became a dominant market narrative.

The post-2008 period saw sustained M2 growth accompanied by rising asset prices across multiple markets, including stocks, real estate, and eventually cryptocurrencies. This era established the framework for understanding how monetary expansion could drive asset appreciation even in the absence of strong economic fundamentals.

2020 COVID-19: Largest Liquidity Injection in History

As pandemic-related lockdowns severely contracted the real economy, the U.S. government and Federal Reserve implemented massive fiscal spending and near-unlimited quantitative easing. This response dwarfed even the measures taken during the 2008 financial crisis.

During this period, U.S. M2 money supply increased by over 25% in a short timeframe, representing the most rapid monetary expansion in modern history. This unprecedented liquidity injection fueled dramatic price increases across diverse asset classes including Bitcoin, stocks, real estate, and NFTs.

The pandemic period provided perhaps the clearest demonstration of the correlation between M2 expansion and cryptocurrency prices. Bitcoin's rise from around $7,000 to over $60,000 during this period coincided almost perfectly with the massive expansion of global money supply.

2022-2023: Shift to Tightening and M2 Decline

As inflation accelerated in the following year, the Federal Reserve pivoted to tightening policies, rapidly raising benchmark interest rates and implementing quantitative tightening. This represented a dramatic reversal from the expansionary policies of previous years.

During this period, not only did U.S. M2 growth slow, but for the first time in decades, it actually declined. This contraction in money supply coincided with significant corrections in asset markets, including cryptocurrencies, validating theories about the correlation between M2 and asset prices.

The tightening period demonstrated that the relationship between M2 and Bitcoin works in both directions—just as M2 expansion can fuel price appreciation, M2 contraction can contribute to market corrections. This cyclical pattern has become an important consideration for cryptocurrency investors and analysts in understanding market dynamics.

FAQ

What is M2 money supply? How does it affect Bitcoin price?

M2 money supply includes all currency and near-money assets in circulation. Increased M2 typically causes inflation, reducing currency value and pushing investors toward Bitcoin as a hedge, driving its price higher.

What historical correlation exists between global M2 money supply and Bitcoin?

Globally, M2 money supply typically leads Bitcoin price movements by approximately 10 weeks. This historical relationship shows that increases in monetary liquidity precede Bitcoin price appreciation, though this correlation is not absolute and varies across different market cycles.

What is the transmission mechanism of central bank quantitative easing (QE) policies on M2 and Bitcoin prices?

Central bank QE increases M2 money supply by injecting liquidity into markets. This typically strengthens risk assets like Bitcoin as investors seek yield alternatives to low returns, potentially driving Bitcoin prices higher as currency depreciation concerns grow.

How to use M2 money supply data to predict Bitcoin price trends?

M2 money supply shows significant correlation with Bitcoin prices in mid-to-long term cycles, with a 108-day lag effect. By monitoring global M2 growth rates and their expansion phases, you can identify potential Bitcoin price movements and market cycles aligned with macroeconomic liquidity conditions.

Is there a correlation between M2 growth rates in different countries and their domestic Bitcoin adoption rates?

M2 growth rates and Bitcoin adoption lack clear direct correlation. Economic data shows no consistent statistical relationship across countries. Bitcoin adoption varies significantly based on local regulations, financial infrastructure, and cultural factors rather than monetary supply alone.

What is the relationship between inflation rate, M2 money supply growth, and Bitcoin as a store of value?

Bitcoin tends to strengthen when inflation and M2 growth accelerate, as investors seek inflation hedges. Higher inflation expectations drive Bitcoin demand, with its price reflecting market responses to monetary expansion and purchasing power erosion concerns.

How is the correlation between global M2 expansion and Bitcoin bull-bear cycles from 2020-2024?

Global M2 expansion showed weak correlation with Bitcoin cycles during 2020-2024. Bitcoin transitioned from a speculative asset with extreme volatility to a maturing asset with narrowing price swings, increasingly driven by adoption and market maturity rather than monetary policy alone.

When central banks tighten monetary policy and M2 growth slows, how does Bitcoin typically perform?

Bitcoin often experiences increased volatility and may appreciate as investors seek alternative assets to hedge against currency devaluation. Historically, Bitcoin has served as a potential inflation hedge during monetary tightening cycles.