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Bitcoin (BTC) aligns with global liquidity 83% of the time, outpacing all other significant asset categories, as stated in a report by venture capitalist Lyn Alden.
The report indicates that Bitcoin has demonstrated a robust correlation with global liquidity over time, typically increasing when liquidity expands and correcting when it contracts. This characteristic positions Bitcoin as the “most accurate liquidity indicator.”
Proximity to liquidity surpasses gold and stocks
The findings reveal that Bitcoin’s price displayed a correlation of 0.94 with global liquidity from May 2013 to July 2024, signifying a very strong positive association.
Nonetheless, the correlation diminishes over shorter durations, averaging 0.51 on a 12-month rolling basis and 0.36 on a 6-month rolling basis.
Importantly, the liquidity metric utilized in this analysis is the M2 supply, which gauges the global money supply. This encompasses cash in physical savings, funds in bank accounts, and other short-term savings instruments available in the market.
In comparison to other assets, Bitcoin retains the highest average correlation with global liquidity over a rolling 12-month timeframe, with gold following closely behind. Stock indices exhibit the next strongest correlations, while bond indices reflect the weakest.
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Bitcoin’s directional alignment with liquidity distinguishes it. In 83% of 12-month intervals and 74% of 6-month intervals, Bitcoin moved in the same direction as global liquidity. This reliability surpasses that of other traditional assets examined in the report.
On-chain data is essential
The research indicates that global liquidity serves as a crucial factor influencing Bitcoin’s long-term price trajectory. For investors, this understanding can be beneficial when assessing Bitcoin market cycles and predicting future price trends.
However, Bitcoin’s correlation with liquidity may weaken during significant industry events or extreme market conditions.
The study highlighted instances where the correlation diminished around major occurrences such as the Mt. Gox hack and the “Crypto Credit Contagion” triggered by the collapse of TerraLuna.
Supply-side dynamics also affect Bitcoin’s liquidity correlation. The “Bitcoin 1+ Year HODL Wave” metric and the Market Value to Realized Value Z-Score (MVRV Z-score) can assist in identifying times when Bitcoin might deviate from its long-term correlation with global liquidity.
The proportion of investors holding Bitcoin for over a year decreases during bull markets as these holders take profits, and increases when they re-accumulate during crypto downturns. Additionally, when the MVRV Z-score is low, the market price may be at or slightly below the realized price, indicating that BTC is undervalued.
Consequently, the report concluded that integrating the analysis of global liquidity with on-chain metrics like the MVRV Z-score can yield a more thorough understanding of Bitcoin’s price cycles and assist in pinpointing periods when sentiment may overshadow liquidity conditions.
The post Bitcoin’s correlation with global liquidity outshines gold and stocks appeared first on CryptoSlate.
