Global M2 Money Supply Hits Record High—Why Isn’t Bitcoin Rallying?
Despite the unprecedented rise in the global M2 money supply, Bitcoin’s price has not experienced a corresponding surge. This situation raises questions about whether the cryptocurrency market is facing a fundamental issue or if a delayed breakout is on the horizon.
Markets on Edge as the Fed Meeting Approaches
As the Federal Reserve prepares for its meeting on March 18-19, market participants are grappling with increasing uncertainty. Economic volatility persists, with stock markets facing downward pressure and inflation remaining a concern. Investors are reassessing their forecasts regarding potential interest rate cuts. Recent tariff policies from President Trump, alongside federal layoffs, have added further unease about the economic landscape, exacerbating instability in an already tenuous market. Although many analysts expect the Federal Open Market Committee to maintain interest rates at 4.25-4.5%, with a 99% probability of no immediate changes according to CME Group’s FedWatch tool, attention is now focused on when the first rate cut might occur. Current forecasts indicate a possible rate reduction in June, with a 55% likelihood that it could drop to between 4-4.25%. Investors are generally anticipating a total decrease of 0.75% in 2025, which could lower the Fed’s benchmark rate to a range of 3.5-3.75%. Amid this backdrop of uncertainty, financial markets have reacted sharply: the S&P 500 has fallen over 8% from its all-time high on February 19, and the Nasdaq experienced a 4% drop on March 10, marking its most significant trading day decline since 2022. Additionally, the volatility index has spiked to its highest point since August, indicating the challenges investors face amid shifting policies, particularly regarding Trump’s tariff increases. Bitcoin (BTC) has also struggled to gain traction, hovering around $82,300 as of March 18—approximately 25% lower than its record high of $109,114 reached in January.
Rising M2 Liquidity
The global liquidity landscape is expanding, and historical trends suggest that this could soon impact risk assets like Bitcoin. As of March 10, the global M2 money supply reached an all-time high of $108.2 trillion, reflecting a 3.5% increase from its previous low of $104.5 trillion recorded on January 6. Nevertheless, Bitcoin’s price movements have been erratic during this period of increasing liquidity, raising questions about whether a delayed reaction is at play. M2 money supply serves as a comprehensive indicator of global liquidity, including cash, checking deposits, and other quickly convertible near-money assets. When M2 expands, it typically channels liquidity into high-yield investments, often resulting in rallies across stocks, commodities, and Bitcoin. Conversely, periods of M2 contraction are usually associated with risk-averse market conditions, where assets struggle to gain upward momentum. It is essential to monitor shifts in global liquidity, as it is a pivotal factor influencing Bitcoin’s long-term trajectory. Data from 2013 to 2024 shows a 94% correlation between Bitcoin and M2 growth, highlighting why many investors are advocating for an end to quantitative tightening (QT) and a return to quantitative easing (QE).
Examining Historical Data and Bitcoin’s Reaction
A detailed analysis of historical patterns reveals a strong relationship between Bitcoin’s performance and M2 growth. Significant bull markets for Bitcoin have typically occurred during times of rapid liquidity expansion, while downturns in M2 have often preceded price declines or lengthy consolidation phases. However, it’s noteworthy that Bitcoin does not typically respond immediately to changes in liquidity. Research indicates that there is an average delay of about 10 weeks before Bitcoin fully reflects alterations in M2 growth. This pattern is further supported by recent M2 data, which shows that Bitcoin’s recovery from its lows in 2022-2023 aligned with a notable increase in M2. Similarly, a surge in M2 in mid-2024 coincided with Bitcoin reaching new highs. Yet, in early 2025, Bitcoin entered a consolidation phase despite M2 continuing to rise. The key factor appears to be not just the absolute level of liquidity but the speed of its growth. When analyzing Bitcoin’s year-on-year returns against the YoY change in M2, a more distinct pattern emerges—Bitcoin’s most robust bull runs often occur when liquidity growth accelerates rather than remains stable. Thus, simply expanding liquidity is insufficient for triggering a breakout; a rapid increase in M2 growth is essential.
Quantitative Tightening Nearing Its Conclusion
The Federal Reserve’s quantitative tightening (QT) initiative, which has been in place since June 2022, may be nearing its conclusion. As of March 18, more than $6.2 million has been wagered on Polymarket, with traders assigning a 100% probability that QT will end by April 30. Essentially, QT involves the Fed allowing assets on its balance sheet to mature, thereby removing liquidity from the economy, which contrasts with quantitative easing (QE) that injects liquidity by purchasing bonds. While this approach has been instrumental in controlling inflation, it has also led to liquidity constraints that have impacted financial markets. Although both stocks and cryptocurrencies have managed to rally despite the tightening effects of QT, there are growing concerns that continued balance sheet reductions could further drain liquidity amid rising economic uncertainties. Minutes from the January FOMC meeting indicated that several policymakers were inclined to consider slowing or pausing QT due to various uncertainties, including the federal debt ceiling and changing money market conditions. Analysts note that the Treasury Department’s temporary measures to fund government operations have injected fleeting liquidity into the system, complicating the Fed’s ability to accurately gauge actual reserve levels and increasing the risk of an overly rapid liquidity withdrawal, which could heighten market volatility. While there is a consensus about the potential end of QT soon, not all analysts agree on when this will happen. Barclays predicts QT will conclude between September and October, positing that a pause in March or May, only to resume reductions later, would be inefficient. On the other hand, Wrightson ICAP analysts believe the Fed is more likely to slow down asset runoffs instead of stopping them entirely, cautioning that an abrupt halt could necessitate future asset purchases, complicating communication for policymakers. Some researchers, like LH Meyer, warn that any pause in QT could inadvertently lead to a complete stop, making resumption difficult, particularly in fragile market conditions. The Fed faces challenges in determining the appropriate time to conclude QT, as mixed signals from liquidity indicators complicate its decision-making. A survey conducted among major banks and money managers prior to the last policy meeting indicated a potential end to QT between June and July. Currently, Fed holdings have diminished to $6.8 trillion from a peak of $9 trillion in 2022, with expectations that they will further decline to around $6.4 trillion by the end of the QT process. However, estimates suggest that bank reserves may only decrease from $3.3 trillion to $3.125 trillion, while the Fed’s reverse repo facility, which measures excess liquidity, has remained below $100 billion throughout February, signaling tighter financial conditions than intended. Historically, unwinding QT has been a delicate undertaking, and if the Fed indicates an imminent halt, it could mark the end of the QT phase. Should that occur, the ramifications could be extensive—lower long-term interest rates, a weaker dollar, and potentially heightened demand for risk assets like Bitcoin and stocks.
Liquidity Surge Faces Institutional Hesitation
While the increase in M2 money supply has historically foreshadowed Bitcoin bull runs, on-chain metrics and institutional developments indicate that the immediate outlook may not align with this trend. Despite the record-high global M2, Bitcoin’s price movements suggest signs of fatigue. Ki Young Ju, CEO of CryptoQuant, cautions that all on-chain indicators are signaling a bear market, highlighting a decline in fresh liquidity and new whales selling BTC at lower price points. His analysis, utilizing Principal Component Analysis (PCA) across various metrics, indicates that Bitcoin’s price may not respond promptly to rising liquidity. Key metrics include MVRV (Market Value to Realized Value), which assesses Bitcoin’s market value in relation to the price at which coins last changed hands, assisting in determining whether BTC is overvalued or undervalued. Another significant metric is SOPR (Spent Output Profit Ratio), which evaluates whether Bitcoin holders are selling at a profit or loss. Additionally, NUPL (Net Unrealized Profit/Loss) tracks the overall profitability of Bitcoin holders based on unrealized gains and losses across the network. According to these indicators, Bitcoin may be entering a consolidation phase lasting 6 to 12 months, which is a pattern typically observed after major bull runs. If this hypothesis holds, Bitcoin’s reaction to rising liquidity could be delayed rather than immediate, reflecting historical cycles where liquidity expansions took months to translate into positive price movements. Simultaneously, institutional challenges are intensifying. The U.S. government has recently established a Bitcoin Strategic Reserve, signifying a notable shift in its perception of Bitcoin as an asset. However, this initiative has not been well-received by global financial institutions. Max Keiser, a prominent Bitcoin advocate and senior advisor to the El Salvador government, pointed out that the IMF and credit rating agencies have begun downgrading the U.S. credit rating, citing Bitcoin’s “destabilizing influence.” Keiser further noted that the IMF is recommending the immediate liquidation of the Bitcoin Strategic Reserve, raising concerns about possible political pressure on U.S. Bitcoin holdings. If the government were to begin liquidating its Bitcoin reserves under such pressures, it could add downward pressure to the market in the short term. Investors should remain vigilant regarding potential near-term volatility while closely observing liquidity trends and governmental actions. Bitcoin’s movements in the upcoming months may require patience before any significant shifts occur.
Trade wisely and only invest what you can afford to lose.
Disclosure: This article does not constitute investment advice. The content and materials presented are intended for educational purposes only.
