According to a comprehensive report by venture capitalist Lyn Alden, Bitcoin (BTC) demonstrates a significant synchronization with global liquidity, operating in tandem 83% of the time. This striking figure surpasses correlations seen in other major asset classes, highlighting Bitcoin’s unique positioning in the financial ecosystem.

The report emphasized that Bitcoin’s relationship with global liquidity is not only strong but also persistent. Historically, Bitcoin’s value tends to increase in tandem with liquidity expansion while typically experiencing corrections when there is a contraction in the global monetary system. This predictable responsiveness has led experts to categorize Bitcoin as the “purest liquidity barometer” in the market.

Bitcoin’s Superiority Over Gold and Stocks

Diving further into the analytics, the report revealed that Bitcoin’s price correlates with global liquidity at a striking coefficient of 0.94 from May 2013 to July 2024. Such a high correlation signifies a robust positive connection, suggesting that investments in Bitcoin are increasingly reflective of changes in the wider financial landscape.

However, the report also indicated that the correlation diminishes in shorter time frames. Specifically, Bitcoin demonstrated an average correlation of 0.51 on a 12-month rolling basis and further declined to 0.36 over a 6-month period. This indicates that while Bitcoin maintains a strong overall relationship with liquidity, its immediate price movements can be more unpredictable.

The liquidity metric utilized in this analysis is the M2 supply, which encompasses the total global money supply. This includes not just cash held by individuals but also funds in bank accounts and various short-term savings instruments available in financial markets.

In comparison with other asset classes, Bitcoin consistently showcases the highest average correlation with global liquidity on a rolling 12-month basis, with gold trailing closely behind. Stock indices and bond indices follow, but exhibit notably lower correlations. This indicates Bitcoin’s growing role in the landscape of traditional investments.

Bitcoin’s interaction with liquidity is compelling; across 83% of 12-month periods and 74% of 6-month periods, Bitcoin trends in the same direction as global liquidity. This consistent alignment outshines the performance of other traditional assets included in the study, presenting Bitcoin as a key investment asset for those keen to navigate economic cycles.

The Importance of On-Chain Data

The findings underscore that global liquidity acts as a substantial force behind Bitcoin’s long-term price dynamics. This information is invaluable for investors, particularly when assessing Bitcoin’s market cycles and predicting future price trajectories. However, it is crucial to recognize that the correlation can waver during significant market events or extraordinary conditions.

The study highlighted specific cases where this correlation weakened, notably during profound events like the infamous Mt. Gox hack and the “Crypto Credit Contagion” caused by the collapse of TerraLuna. Such occurrences underscore the volatile nature of cryptocurrency, further complicating investment decisions.

Additional supply-side indicators also contribute to Bitcoin’s liquidity correlation. Metrics such as the “Bitcoin 1+ Year HODL Wave” and the Market Value to Realized Value Z-Score (MVRV Z-score) are essential for identifying times when Bitcoin may deviate from its historical correlation with global liquidity trends.

For instance, during periods of market optimism, the proportion of investors holding Bitcoin for over a year typically decreases as these long-term holders take profits. Conversely, this metric increases during market downturns as new investors start accumulating assets. Additionally, when the MVRV Z-score is low—indicating that the market price is at or below the realized price—this may imply that Bitcoin is undervalued relative to its fair price. Hence, discerning these patterns becomes instrumental for prospective investors.

The report ultimately suggested that combining global liquidity analysis with on-chain metrics like the MVRV Z-score offers a more nuanced understanding of Bitcoin’s price cycles. This blended approach not only aids in recognizing opportunities but also assists investors in identifying moments when market sentiment may overshadow prevailing liquidity conditions.

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