Using Global Liquidity and Stablecoins to Forecast Bitcoin Price Action
Tracking global liquidity has become essential for forecasting Bitcoin's price movements. While global M2 money supply is a valuable metric, analyzing the rate of change in stablecoin supply can provide even more targeted insights into the cryptocurrency market. This article explores both metrics and how they can be used to inform investment decisions.
Global M2 Money Supply and Bitcoin
Understanding Global M2
The global M2 money supply tracks the total amount of currency and near money within a country's economy across the world's major economies. Expansion in this metric, driven by fiscal stimulus and increased liquidity, often coincides with bullish periods for Bitcoin. The 2020 bull cycle is a prime example, as well as the cycle of 2016-2017. Conversely, contractions in global liquidity, like those seen in 2018, 2019 and 2022, have aligned with bearish price action.
Year-on-Year Analysis
Analyzing the global M2 money supply on a year-on-year basis offers valuable insights. While governments tend to consistently print money, the rate of acceleration or deceleration in this expansion more clearly highlights the correlation between Bitcoin's price and the flow of liquidity. A general uptrend, even with minor dips, suggests positive periods for Bitcoin.
Limitations of Global M2
The global M2 metric, while useful, has a delay in its impact. Liquidity tends to flow into safe-haven assets before reaching more volatile assets like Bitcoin. This delay necessitates exploring alternative metrics that may provide more immediate insights. The correlation between the global liquidity and BTCUSD is 83%. However, that can be increased to 91.69% with the 2 year delay.
Stablecoin Supply as an Alternative Metric
Correlation with Bitcoin Price Action
Tracking the supply of stablecoins such as USDT, USDC, and DAI can provide a more specific indicator of cryptocurrency market liquidity. In fact, there is an almost 100% correlation with the BTCUSD chart. Analyzing the rate of change in the stablecoin supply on a monthly basis (28-day) can accurately outline upcoming price movements for Bitcoin.
Using the Rate of Change
Focusing on the rate of change in stablecoin supply rather than the raw values offers a valuable perspective. A significant increase in stablecoin liquidity often precedes positive price appreciation for Bitcoin, while a decline can signal a potential drawdown.
Identifying Accumulation Opportunities
A practical approach is to monitor when the rate of change in stablecoin supply crosses above zero, which indicates a positive change and historically has been a good time to begin accumulating BTC. These moments, particularly following long periods of contraction, can represent opportunities to acquire Bitcoin at discounted prices.
Intraday Analysis
The stablecoin supply rate of change can also be applied to intraday analysis. Examining this metric on a shorter timeframe, such as a 4-hour chart, can reveal more frequent changes in liquidity and potential trading opportunities. Dips can be seen as aggressive accumulation areas, while spikes can indicate areas for scaling out of positions or taking profits.
Conclusion
Both global M2 money supply and stablecoin supply analysis offer valuable insights for forecasting Bitcoin's price action. By monitoring the rate of change in stablecoin supply, investors can gain a more targeted understanding of liquidity flows within the cryptocurrency market and identify potential accumulation or profit-taking opportunities. Using these tools in combination can help to cut through the noise and make informed data and decisions about Bitcoin.