This is what the current situation means for the BTC price

In this article you will learn:

  • How the new “interest rate inflation reality” affects the Bitcoin price
  • Why the influence of the Japanese central bank on the Bitcoin price cannot be underestimated
  • What next steps in monetary policy are likely in the coming weeks

The statement “If the money supply increases, then Bitcoin also increases” may be very simplistic, but it has proven to be very reliable in the past. If you look at the global money supply M2 of the largest currency areas, then the correlation between Bitcoin and M2 is almost 90 percent. While this phenomenon gave us a boom in the crypto and stock markets in the wake of the Corona crisis, we felt the downside with the subsequent interest rate increases. High inflation has forced emergency banks to reduce liquidity by cutting back on bond purchases and making raising capital more expensive.

Status quo Bitcoin and money supply

The major central banks reached the peak of the reduction in the M2 money supply in November 2022 – a temporary bottom was identified. What then followed was a scripted price movement: cryptocurrencies and stocks recovered along with increasing liquidity.

The correlation of the money supply M2 and Bitcoin, source: Global Macro Investor

Since recently, the M2 money supply has been stagnating again and has recently even declined slightly. Regardless of whether Bitcoin or the NASDAQ stock index: the prices corrected. The correction was recently reinforced by high inflation and thus reduced expectations of interest rate cuts.

Ultimately, inflation in the major currency areas is more persistent than hoped. Fed chief Jerome Powell in particular has recently sent the markets plummeting with his words. Of the three interest rate cuts previously priced in for 2024, the market only expects one reduction towards the end of the year. But even this is now increasingly being questioned.

Macro vs. fundamental factors

Accordingly, the past few days have seen the new “inflation interest rate reality” being priced in. Of course, it would be too simplistic to assume a purely monocausal connection between the money supply M2 and asset prices.

Even independent of the money supply, a correction in the crypto market was overdue in order to reduce overheating. Especially since there was some fundamentally bad news for the crypto industry that depressed market sentiment.

The main point to be mentioned here is the new regulatory attack by the American Securities and Exchange Commission (SEC) against the sector. In addition to lawsuits against crypto companies such as MetaMask or the crypto mixer Samourai Wallet, US regulators are also expected to reject Ethereum spot ETF applications in May. The statement: “Sell in May and go away” is becoming more and more likely to become a self-fulfilling prophecy.

Bring more focus on Japan

In the context of the money supply and the Bitcoin price, however, one should not only look at the USA or the Fed’s monetary policy. The ECB and Bank of Japan also have a major influence on the level of the global money supply M2. Japan in particular has been in focus in recent weeks as the country has ended its decades-long zero interest rate policy since 1998.

Although significantly lower than in other currency areas, Japan, which actually only knows deflation, has recently been confronted with inflation. At the same time, the yen is tumbling more and more, and ever larger interventions by the Bank of Japan are necessary to offset the fall in prices against the US dollar.

Things are currently looking anything but good for the yen. As inflation expectations rise, the US dollar continues to appreciate. Source: Crescat Capital LLC

This new monetary situation is linked to concerns that Japan will not support the markets with the usual aggressiveness in the future. In recent weeks, Japan has increasingly turned from a permanent support factor into a burdensome factor. For an asset like Bitcoin, which serves as a strong proxy for the money supply, this is not good news at all. To put it bluntly: saving the yen comes at the expense of Bitcoin.

Postponed is not cancelled

The fact that the major central banks are not lowering interest rates as quickly as hoped is slowing down the markets. However, the principle applies that high interest rates also entail high interest costs, which states, households and companies ultimately have to pay. In order to prevent a cost explosion, which ultimately leads to excessive indebtedness that can no longer be managed, the expansion of the M2 money supply is only postponed, not canceled.

Especially since the risks in the system increase as interest rates remain high. Just think of the bank failures Silicon Valley Bank or First Republic Bank. With its current restrictive stance, the USA is also endangering other currency areas that need an interest rate cut even more urgently but do not dare to leave. Among other things, the ECB is very closely aligned with the Fed’s monetary policy.

Macro Outlook for Bitcoin

Even if interest rates remain higher for longer than expected, the M2 money supply can be increased in other ways, for example by purchasing government bonds (quantitative easing, QE). It can be assumed that, when in doubt, central banks will accept higher inflation rather than risk their economies collapsing.

For the Bitcoin price, this means above all that there is currently no positive stimulus from monetary policy. On the other hand, the greater the damage caused by the restrictive monetary policy, the more severe the central banks’ future reactions could be. The monetary policy measures for the corona pandemic have shown how quickly an expansion of the money supply can drive up prices.

Even if this scenario should not repeat itself, with each passing month the chances increase that the pendulum of liquidity will swing back and Bitcoin will start the next rally. Unless we experience an inflationary shock from external events such as geopolitical escalations, the next boost in liquidity is likely to come from the central banks mentioned this year. For the time being, however, a dry spell or summer break is not unlikely.

Disclaimer: The article only reflects the opinion of the author. These are not buy or sell recommendations.

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