What's Happening?
Cryptocurrency analyst Benjamin Cowen has argued that Bitcoin's performance does not correlate with the M2 money supply as commonly believed. Cowen, speaking on his podcast, highlighted that M2, which measures cash and readily available deposits, reached
record highs in 2014, 2018, and 2022, yet Bitcoin experienced significant declines during these periods. Instead, Cowen tracks global net liquidity, a metric that combines the balance sheets of major central banks, including the Federal Reserve, the European Central Bank (ECB), and the central banks of Japan, China, and the UK. This metric then subtracts money held in the Fed's reverse repo facility and the U.S. Treasury General Account. Currently, global net liquidity stands at approximately $25 trillion, a notable decrease from its $30 trillion peak in 2021 and 2022. This $5 trillion gap, according to Cowen, fully explains why Bitcoin has underperformed compared to equities, despite the continued rise in M2.
Why It's Important?
This analysis is important because it challenges a widely held assumption within the cryptocurrency market regarding Bitcoin's drivers. If M2 money supply is not the primary factor influencing Bitcoin's price, investors and analysts may need to re-evaluate their models and strategies. Cowen's focus on global net liquidity suggests that the collective actions and balance sheets of major central banks, along with specific U.S. Treasury and Federal Reserve facilities, have a more direct and significant impact on Bitcoin's valuation. This shift in understanding could lead to more accurate predictions of Bitcoin's future movements and better risk management for investors. The underperformance of Bitcoin relative to equities, particularly in a period of rising M2, indicates that broader macroeconomic liquidity conditions, rather than just domestic money supply, are crucial for the cryptocurrency's trajectory. This perspective could influence how financial institutions and individual investors allocate capital within the digital asset space.
What's Next?
According to Benjamin Cowen, the trigger for Bitcoin's next cycle of outperformance is straightforward: central banks need a reason to expand their balance sheets again. Until such expansion occurs, Bitcoin is likely to continue lagging behind equities. Cowen draws a parallel to 2019, when M2 increased and stocks reached all-time highs, but Bitcoin still dropped because global net liquidity was not expanding. Bitcoin only reversed its trend when the COVID-19 pandemic necessitated a significant injection of liquidity by central banks. The current market environment, characterized by AI-driven strength in mega-cap stocks keeping the S&P 500 elevated, reduces the immediate pressure on central banks to implement further liquidity measures. Therefore, the future performance of Bitcoin hinges on potential shifts in central bank policies that would lead to an expansion of global net liquidity, which could be prompted by unforeseen economic challenges or policy changes.
Beyond the Headlines
The distinction between M2 money supply and global net liquidity, as highlighted by Benjamin Cowen, points to a deeper understanding of financial market dynamics and their impact on nascent asset classes like Bitcoin. While M2 reflects the domestic availability of money, global net liquidity captures a more comprehensive picture of the overall financial system's capacity for investment and speculation across international borders. This perspective suggests that the interconnectedness of global financial markets and the coordinated (or uncoordinated) actions of central banks worldwide play a more critical role in determining the fate of highly speculative assets. The current scenario, where Bitcoin's shallow drawdown compared to previous bear markets is attributed to a lack of speculative euphoria fueled by insufficient net liquidity, underscores the importance of systemic liquidity over localized money supply metrics. This could lead to a re-evaluation of how macroeconomic indicators are interpreted in the context of digital assets, potentially fostering a more sophisticated approach to cryptocurrency analysis that considers global financial flows and central bank interventions as paramount.
