The growth of the M2 money supply is a crucial indicator for cryptocurrencies, revealing patterns when past cycles are examined. The velocity and stability of M2 growth become essential factors for crypto enthusiasts.
M2 and the Cryptocurrency Market
Bitcoin and the broader cryptocurrency market exhibit a direct correlation with M2 money supply. The accompanying graph illustrates this relationship, showing the impact of significant stimulus packages and monetary policies observed in 2020 and 2021 on Bitcoin prices and M2 growth. In 2022, a contraction in global money supply caused M2 growth to turn negative, adversely affecting Bitcoin's value.
Cryptocurrency Prices and Economic Policy
Liquidity issues are not confined to the US, which means crypto investors can find some solace. Central banks in Europe and China are loosening their monetary policies, while some voices within the Fed argue for an end to balance sheet reduction, signaling a need for a gradual pivot from tight monetary policy. Despite the ECB’s cautious stance due to ongoing uncertainties, they still plan to maintain expansion. In China, additional liquidity is being injected to address ongoing economic challenges.
Future of M2 and Cryptocurrency Prospects
However, there is a notable difference between current and historical supply levels. Although interest in safer assets has risen due to the trade war, the unsustainable nature of such conflicts suggests that stability must return after April 2, ending the aftershocks of this turmoil.
The cryptocurrency market is directly influenced by changes in the M2 supply. The expectation of stabilization after sharp liquidity shifts may open new opportunities for cryptocurrency investors.
