Bitcoin (BTC), M2 at Record High, Why Isn't It Soaring? 'Hindered' by $5 Trillion in Liquidity

▲ Dollar (USD), Bitcoin (BTC)/AI Generated Image

An analysis suggests that the reason Bitcoin (BTC) has not gained momentum despite M2 money supply reaching an all-time high is due to global net liquidity actually released into the market, rather than the sheer volume of money.

Veteran trader Benjamin Cowen argued in a video released on his YouTube channel on September 3 (local time) that Bitcoin reacts more sensitively to global net liquidity than to M2. M2 has increased to record highs in the US and globally, and the US stock market also recently reached an all-time high. However, Bitcoin has not followed the same trend. Cowen emphasized, “You shouldn't view it as Bitcoin rising when the money supply increases”; instead, you should observe the rate of change in liquidity.

Cowen cited 2019 as evidence. At that time, M2 increased and the stock market headed towards record highs, but Bitcoin declined. He presented global net liquidity as a key indicator, calculated by summing the balance sheets of the Federal Reserve (Fed), the Bank of Japan, the People's Bank of China, the Bank of England, and the European Central Bank (ECB), then subtracting reverse repos and the US Treasury General Account (TGA). He explained that this indicator is more crucial than M2 for assessing whether funds are actually being released into the financial market.

The gap is also significant. The global net liquidity presented by Cowen was approximately $30 trillion in 2022 but has recently hovered around $25 trillion. This means there is a deficit of approximately $5 trillion. He explained that a strong dollar can also reduce global net liquidity by lowering the dollar-denominated value of other countries' central bank assets. Conversely, if the dollar weakens, the dollar-denominated value of the same assets increases, leading to an expansion of net liquidity.

Cowen's view is that the strength of large-cap Artificial Intelligence (AI) stocks has paradoxically acted as a burden on Bitcoin. He explained that as large tech stocks like Alphabet, Microsoft, Amazon, and Apple supported the stock market, the Fed did not have a strong need to aggressively expand its balance sheet to stimulate financial markets. In reality, global net liquidity has remained around $25 trillion for several years. Cowen pointed out that even if Bitcoin reached an all-time high in dollar terms in this environment, its relative performance against the S&P 500 was weak.

Cowen interpreted the absence of an altcoin bull market in the same context. He stated that while strong liquidity expansion was expected merely because M2 and the stock market were at record highs, actual net liquidity did not significantly increase. He also believed that Bitcoin's recent peak was not formed amid extreme market optimism, as in the past. Cowen asserted, “It's not that Bitcoin has become disconnected from liquidity, but rather that the market has been focusing on the wrong liquidity indicators.”

[Article Key Summary]

-Benjamin Cowen analyzed that Bitcoin reacts more sensitively to global net liquidity than to M2.

-He viewed global net liquidity decreasing from approximately $30 trillion in 2022 to about $25 trillion recently as limiting Bitcoin's relative strength.

-Cowen also attributed the absence of an altcoin bull market and Bitcoin's limited upside to low global net liquidity.

*Disclaimer: This article is for investment reference only, and we are not responsible for investment losses based on it. The content should be interpreted for informational purposes only.*