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The liquidity in the crypto market has been in a hurry recently. Bitcoin fell again after several months of sideways fluctuations, reaching a low of $86,000, a higher point The callback is nearly 20%. As the leader of cryptocurrency, the decline of Bitcoin has brought about the collapse of a number of altcoins, and market sentiment has once shifted from greed in the MeMe period to panic.

Is the cryptocurrency bull market still there? Will Bitcoin still break through upward? This is probably a topic that many people are concerned about. However, the current trend of Bitcoin is already closely related to the global financial market. Sam Callahan, a research analyst at Swan Bitcoin, is worth reading this article about the relationship between Bitcoin price and global liquidity.

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Bitcoin is consistent with global liquidity trends 83% of the time in any 12 months, which is higher than any other major asset class, making It has become a powerful indicator to reflect liquidity conditions.

Although Bitcoin has a high correlation with global liquidity, it is not entirely immune to short-term deviations, especially during extreme valuations, which are disturbed by specific events or internal market dynamics. .

Combining global liquidity conditions and valuation indicators on the Bitcoin chain, we can understand Bitcoin's cyclical changes more carefully, helping investors identify moments when internal market dynamics may temporarily disconnect Bitcoin from liquidity trends. .

Understanding how asset prices fluctuate with changes in global liquidity has become the key to investors' increased returns and effectively manage risks. In today's market, asset prices are increasingly directly affected by the central bank, and liquidity conditions have become the main factor driving asset prices, and fundamentals alone no longer play a decisive role.

This has been particularly evident since the Global Financial Crisis (2007-2008). Since then, more and more unconventional currencies have become the dominant force in driving asset prices. The central bank has turned the market into a big deal by regulating liquidity leverage, and as economist Mohamed El-Erian said, the central bank has become the "soon protagonist".

Stanley Druckenmiller also agreed, pointing out: "Rewards do not drive the overall market; it is the Federal Reserve... Focus on the central bank, focus on changes in liquidity... Most people in the market are looking for profits and traditional indicators, but what drives the market is actually liquidity. ”

This is particularly significant when studying the close relationship between the S&P 500 and global liquidity.

The explanation of the above chart can be attributed to a simple supply and demand relationship. If more funds are available to buy assets, whether they are stocks, bonds, gold or Bitcoin, the prices of these assets will usually rise. Since 2008, the central bank has injected a large amount of legal currency into the system, and asset prices have also risen. In other words, monetary inflation drives capitalInflation of production prices.

In this context, understanding how to measure global liquidity and the responses of different assets to liquidity changes has become the key for investors to deal with liquidity-driven markets.

01How to measure global liquidity

There are many ways to measure global liquidity, but in this analysis, we will use global M2, a broad-based indicator of money supply, covering physical currencies and current periods Deposits, savings deposits, money market securities and other forms of easy-to-access cash.

Bitcoin Magazine Pro provides a global measurement of M2, which summarizes data from eight major economies: the United States, , the euro zone, the United Kingdom, Japan, Canada, Russia and Australia. This indicator represents global liquidity well because it reflects the total amount of funds available for expenditure, investment and borrowing worldwide. In other words, it can be seen as a total measure of global credit creation and central bank currency printing.

It should be noted that global M2 is denominated in US dollars. Lyn Alden explains the importance of this in an article:

The US dollar, as a global reserve currency, has become the main accountant unit of global trade, contracts and debt, so the strength of the US dollar is crucial. When the dollar strengthens, the debt burden of countries increases; when the dollar weakens, the debt burden will be reduced. The global broad money supply denominated in US dollars is a key indicator of global liquidity. How fast are fiat currency units created? How strong is the US dollar in the global money market?

When global M2 is denominated in US dollars, it not only reflects the relative strength of the US dollar, but also reflects the speed of credit creation, making it a reliable indicator for evaluating global liquidity conditions.

While there are other ways to measure global liquidity, such as considering short-term debt or global forex swap markets, in the following article, when it comes to “global liquidity”, we will put it Considered as "global M2".

02 Why Bitcoin may be the purest liquidity barometer

One of the assets that have strong correlation with global liquidity over the years was Bitcoin. Bitcoin usually performs strongly as global liquidity expands; while Bitcoin tends to underperform when liquidity shrinks. This dynamic has led some to call Bitcoin a "liquidity barometer."

The following figure clearly shows how Bitcoin prices are consistent with changes in global liquidity.

Similarly, comparing Bitcoin with annual year-on-year changes in global liquidity further highlights the close relationship between the two. When liquidity increases, the price of Bitcoin rises; when liquidity decreases, the price of Bitcoin falls.

From the above chart, it can be seen that the price of Bitcoin is very sensitive to changes in global liquidity. But is it really the most liquid-sensitive asset in the market today?

Overall, the correlation between risky assets and liquidity conditions is more significant. In abundant liquidityIn the environment, investors tend to adopt higher risk/high return investment strategies to shift funds to assets that are seen as more risky; instead, when liquidity tightens, investors often turn to what they think is safer assets. This explains why assets like stocks usually perform well when liquidity increases.

However, stock prices are also affected by other factors that are not related to liquidity. For example, stocks' performance is partially driven by earnings and dividends, so their prices tend to be related to economic performance. This could undermine the sheer correlation between stocks and global liquidity. In addition, U.S. stocks are affected by passive capital inflows from retirement accounts (such as 401(k)) that will affect their performance regardless of liquidity conditions. These passive capital inflows may provide buffers for U.S. stocks when liquidity fluctuates, making them less sensitive to global liquidity conditions.

The relationship between gold and liquidity is more complicated. On the one hand, gold benefits from increased liquidity and weaker US dollar; on the other hand, it is also regarded as a safe-haven asset. Investors seeking safety as liquidity shrinks and markets move to hedging behavior may increase demand for gold. Therefore, even if liquidity is lost from the system, the price of gold is still likely to perform well. This means that gold's performance may not be closely related to liquidity conditions. Similarly, bonds are considered safe-haven assets, so their correlation with liquidity conditions may be less likely.

Back to Bitcoin, unlike stocks, there is no earnings or dividends, and no structural buying affects its performance. In the adoption cycle of Bitcoin, most capital pools still regard it as risky assets compared to gold and bonds. This could keep Bitcoin relatively purely relevant in terms of global liquidity.

If this holds true, it is a valuable insight for Bitcoin investors and traders. For long-term holders, understanding the correlation between Bitcoin and liquidity can provide deeper insights and help analyze the driving forces behind price trends. For traders, Bitcoin is an effective tool to express a view on the future direction of global liquidity.

This article aims to explore in-depth the correlation between Bitcoin and global liquidity, compare its relationship with other asset classes, identify periods of disruption in correlation, and share how investors can use this information to gain advantages in the future insight.

03 Quantitative Correlation between Bitcoin and Global Liquidity

When analyzing the correlation between Bitcoin and global liquidity, the intensity and direction of the correlation must be considered at the same time. The intensity of correlation reveals the degree of synchronization between the two variables. Strong correlation means that the impact of global M2 changes on Bitcoin prices is more predictable, whether in the same direction or in the opposite direction. Understanding this intensity is key to assessing Bitcoin’s sensitivity to global liquidity volatility.

By analyzing data from May 2013 to July 2024, Bitcoin’s strong sensitivity to liquidity can be clearly seen. During this period, Bitcoin price and globalThe correlation between liquidity reached 0.94, showing a strong positive correlation. This shows that during this time period, Bitcoin prices are highly sensitive to changes in global liquidity.

However, if the 12-month rolling correlation is observed, the average correlation between Bitcoin and global liquidity drops to 0.51. This is still a moderately positive correlation, but is significantly lower than the overall correlation.

This shows that the price of Bitcoin has not maintained such a close connection to liquidity on a year-on-year basis. Furthermore, when the 6-month rolling correlation was observed, the correlation further dropped to 0.36. This means that as the time frame shortens, the deviation between Bitcoin’s price and its long-term liquidity trend increases, suggesting that short-term price fluctuations are more likely to be affected by Bitcoin’s own specific factors than liquidity conditions.

To better understand the correlation between Bitcoin and global liquidity, we compared it with other assets, including the SPDR S&P 500 ETF (SPX), Pioneer Global Stock Index ETF (VT ), iShares MSCI Emerging Markets ETF (EEM), iShares U.S. Treasury ETF (TLT), Pioneer Total Bond Market ETF (BND) and Gold.

Bitcoin has the highest average correlation with global liquidity within a rolling 12-month time frame, followed by gold. Stock indexes have a slightly weaker correlation, while bond indexes have the lowest correlation with liquidity, which is consistent with expectations.

When analyzing the correlation between assets and global liquidity by year-on-year changes, the stock index is slightly more relevant than Bitcoin, followed by gold and bonds.

One reason why stocks may be more closely related to global liquidity in annual year-on-year changes is the high volatility of Bitcoin. Bitcoin often experiences large price volatility over a year, which can distort its correlation with global liquidity. In contrast, stock indexes usually show smaller price volatility, making them more consistent with annual year-on-year changes in global M2. Nevertheless, Bitcoin still showed a strong correlation with moderate global liquidity in the annual year-on-year analysis.

The above data emphasizes three key points:

1) The performance of stocks, gold and Bitcoin is closely related to global liquidity;

2) Bits Compared with other asset classes, the coin has a stronger overall correlation and has the highest correlation during the 12-month rolling period;

3) The correlation between Bitcoin and global liquidity is in the time frame It will weaken when shortened.

The consistency between Bitcoin and liquidity makes it unique. As mentioned earlier, a strong positive correlation does not guarantee that both variables always move in the same direction, which is particularly evident in assets with high volatility such as Bitcoin and may temporarily deviate from relatively stable indicators (such as global M2) long-term relationship. Therefore, combining strength and directionThese two aspects allow a more comprehensive understanding of the interaction between Bitcoin and global M2.

By examining the directional consistency of this relationship, we can better understand the reliability of its correlation, which is particularly important for investors who focus on long-term trends. If you know that Bitcoin tends to follow the direction of global liquidity changes most of the time, you can be more confident in predicting its future price movements based on changes in liquidity conditions.

In terms of stability of direction consistency, Bitcoin has the highest direction consistency with global liquidity of all analyzed assets. The probability of Bitcoin moving in the same direction with global liquidity was 83% over the 12-month period and 74% over the 6-month period, highlighting the consistency of the directional relationship.

The following figure further demonstrates the directional consistency between Bitcoin and global liquidity over the 12-month period, compared to other asset classes.

These findings are important because they show that although the intensity of correlations may vary by time frame, the direction of Bitcoin’s price is often consistent with the direction of global liquidity. . In addition, Bitcoin’s price direction is closer to global liquidity than any other traditional asset.

This analysis shows that the relationship between Bitcoin and global liquidity is not only significant in strength, but also very stable in directional consistency. Data shows that Bitcoin is more sensitive to liquidity conditions than other traditional assets, especially over a longer time frame.

For investors, this means that global liquidity may be a key driver of Bitcoin’s long-term price performance, so it should be taken seriously when evaluating Bitcoin market cycles and predicting future price fluctuations. For traders, this means Bitcoin has become a highly sensitive investment vehicle for expressing views on global liquidity, suitable for investors with strong belief in liquidity.

04 Identify the break in Bitcoin’s long-term liquidity relationship

Although Bitcoin has a strong overall correlation with global liquidity, the study found that the price of Bitcoin tends to deviate from liquidity in a short rolling cycle trend. These biases may be due to the greater impact of internal market dynamics at certain moments in the Bitcoin market cycle, or triggered by events specific to the Bitcoin industry.

These individual events refer to events that occur within the wider crypto industry, often leading to rapid changes in market sentiment or triggering large-scale liquidation. For example, major bankruptcies, trading platform hacking, regulatory dynamics or the collapse of Ponzi schemes are all typical examples of such incidents.

Observing historical examples of weakening of the 12-month rolling correlation between Bitcoin and global liquidity, it is clear that the price of Bitcoin is often decoupled from liquidity trends when major industry events occur. . The following figure shows the breakdown of Bitcoin’s correlation with liquidity when these major events occur.

Key events, such as Mt. Gox crash, PlusToken Ponzi scheme solutionThe crypto credit collapse caused by the Terra/Luna collapse and the bankruptcy of several crypto lenders has led to panic and selling pressures that have largely nothing to do with global liquidity trends.

The COVID-19 market crash in 2020 provides another example. Bitcoin initially experienced a sharp decline amid widespread panic selling and risk aversion. However, Bitcoin rebounded rapidly as central banks took unprecedented liquidity injection measures, highlighting its sensitivity to liquidity changes. The correlation break at that time was mainly due to a sudden change in market sentiment rather than a change in liquidity conditions.

Although it is important to understand the impact of these individual events on Bitcoin’s correlation with global liquidity, their unpredictability makes them less operable to investors. However, as the Bitcoin ecosystem matures, infrastructure improvements, and regulatory transparency increases, I expect the frequency of these "black swan" events to decrease over time.

05How supply side dynamics affect Bitcoin’s liquidity correlation

Apart from individual events, another significant pattern of weakening of Bitcoin’s liquidity correlation is that this situation often reaches extremes with Bitcoin’s price The period of valuation and subsequent sharp declines coincided. This is particularly evident in the bull peaks in 2013, 2017 and 2021, during which the liquidity correlation of Bitcoin is disconnected as prices drop significantly from highs.

While liquidity mainly affects demand, understanding the distribution patterns of suppliers can also help identify periods where Bitcoin may deviate from long-term correlation with global liquidity. The main source of available-for-sale is the profit-taking exit of old holders when the price of Bitcoin rises. In addition, there will be new issuances from block rewards on the market, but this part is relatively small and continues to decrease with each halving event. During a bull market, old holders tend to reduce their holdings and sell them to new buyers until new demand reaches saturation. At this saturation point, the peak of the bull market usually occurs.

The key indicator to evaluate this behavior is the HODL Wave of Bitcoin for one year and more, which measures the total circulation of Bitcoin held by long-term investors who have been held for at least one year. Percentage of supply. Simply put, it reflects the proportion of available supply held by long-term investors at any given moment.

Historically, this indicator usually declines during bull markets because long-term holders choose to sell, while during bear markets it rises because they accumulate. The following figure emphasizes this behavior, with the red circle marking the periodic peak and the green circle indicating the bottom.

This illustrates the behavior of long-term holders in the Bitcoin cycle. Long-term holders tend to profit and leave when Bitcoin is considered overvalued, and tend to accumulate when Bitcoin is considered undervalued.

The question becomes… “How to tell if Bitcoin is undervalued or overvalued in order to better predict when supply will influx or beExit the market? ”

While the data set is still relatively small, the MVRV Z-score has proven to be an effective tool to identify whether Bitcoin reaches extreme valuation levels. MVRV Z- score consists of the following three components:

1) Market value - the current market value, calculated by multiplying the price of Bitcoin by the total number of coins in circulation.

2) Realize Value – The average price of the last on-chain transaction for each Bitcoin or Unspended Transaction Output (UTXO), multiplied by the total circulating supply, is basically the on-chain cost basis for Bitcoin holders. < /p>

3)Z-Score—This score measures the degree of deviation between market value and realized value, is expressed in standard deviation, and highlights periods of extreme overvaluation or undervaluation.

When MVRV When Z-score is higher, it means that there is a large gap between the market price and the realized price, and many holders enjoy unrealized profits. Although this is a good phenomenon from an intuitive perspective, it may also be that Bitcoin is being raised. Signal of estimation or overbought – This means that long-term holders may start distributing their bitcoin and making profits.

In contrast, when MVRV Z-score is lower, the market price is close to or below Realize price, which indicates that Bitcoin is undervalued or oversold – this is a good opportunity for investors to start accumulating.

Transfer MVRV Z-score with Bitcoin with global liquidity When the 12-month scrolling correlations are superimposed between them, a clear pattern can be identified. When MVRV As Z-score drops sharply from historical highs, the 12-month scroll correlation seems to decline as well. The red rectangle below highlights these periods.

This phenomenon shows that when the price of Bitcoin reaches The correlation with global liquidity may weaken when extremely high valuation levels and start to adjust. This weakened correlation reflects the impact of supply-side dynamics and the dominant role of market sentiment on price behavior. In these periods, long-term holders often choose to sell by profit, while short-term traders may overreact to price fluctuations, resulting in a disconnect between the short-term trend of Bitcoin prices and changes in global liquidity conditions.

This analysis provides investors with important insights to help them identify potential shifts in the relationship between Bitcoin and liquidity, as well as possible market adjustments at high valuations.

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This shows that when Bitcoin's MVRV When Z-score slides from highs and its correlation with liquidity weakens, internal market dynamics such as profit-taking and panic selling may have a greater impact on Bitcoin prices than global liquidity conditions. In extremes At valuation levels, Bitcoin’s price trends are often driven more by market sentiment and supply-side dynamics than global liquidity trends.

This insight is very important for traders and investors. because it helps identify thatA rare moment when these bitcoins deviate from their long-term liquidity correlation. For example, suppose a trader firmly believes that the dollar will depreciate and that global liquidity will rise in the next year. According to this analysis, Bitcoin will be the best tool to express this view, as it acts as the purest liquidity barometer in the market.

However, these findings suggest that traders should first evaluate Bitcoin’s MVRV Z-score or other similar valuation indicators before placing an order. If Bitcoin’s MVRV Z-score shows extreme overvalued, traders should remain cautious despite the positive liquidity environment, as internal market dynamics may overwhelm liquidity conditions and trigger price corrections.

By simultaneously monitoring the long-term correlation between Bitcoin and global liquidity and its MVRV Z-score, investors and traders are able to better predict how Bitcoin’s price responds to changes in liquidity conditions. This approach enables market participants to make smarter decisions and may improve their chances of success when investing or trading Bitcoin.

06 Conclusion

The strong correlation between Bitcoin and global liquidity makes it an important macroeconomic barometer for investors and traders. This correlation is not only strong, but also shows a high degree of directional consistency when compared to other asset classes. Bitcoin can be regarded as a mirror that reflects the speed of global currency creation and the relative intensity of the US dollar. And unlike traditional assets such as stocks, gold or bonds, the correlation between Bitcoin and liquidity remains relatively pure.

However, Bitcoin’s correlation is not perfect. The study found that Bitcoin’s correlation intensity will decrease in a shorter time frame, which underscores the importance of identifying moments of possible breakdown of correlation between Bitcoin and liquidity. Internal market dynamics, such as unique shocks or extreme valuation levels, may cause Bitcoin to temporarily deviate from global liquidity conditions. These moments are crucial to investors because they often mark a phase of price correction or accumulation.

Combining global liquidity analysis with on-chain indicators such as MVRV Z-score helps to better understand Bitcoin’s price cycles and helps identify prices that are more likely to be subject to market sentiment than The timing driven by wide liquidity trends.

Michael Sailer once said: "All your models are destroyed." Bitcoin represents a paradigm shift in the currency itself. Therefore, no statistical model can perfectly capture the complexity of Bitcoin phenomena, but some models can serve as useful tools for decision guidance, although they are not perfect. As the old proverb says, "There is no absolute in the world, and some models are still useful."

Since the global financial crisis (2007-2008), central banks have distorted financial markets through unconventionality, making Liquidity has become the main driver of asset prices. Therefore, understanding changes in global liquidity is crucial for any investor who wants to succeed in today’s market. In the past, macro analyst Luke Grossom has described BitcoinThis analysis is also supported as the "last working smoke alarm" because it is able to signal changes in liquidity conditions.

When the Bitcoin alarm sounds, investors should listen carefully in order to effectively manage risks and position themselves appropriately, and seize future market opportunities.