Does M2 Drive Bitcoin? Separating Fact from Clickbait
If you’ve been scrolling X, you may have seen charts like this showing the correlation between Bitcoin and Global M2.
If we believe M2 is a 10-week leading indicator for BTC price, Bitcoin is about to tank!
Cue mass panic! Everyone: sell your Bitcoin now!
But is this a thing? Do we need to be concerned?
Or are these posts just cherry-picking the data and engagement farming?
This article will examine the correlation between M2 and Bitcoin and other important variables, such as hash rate, gold, and the S&P 500.
As you’ll learn, M2 is relevant but not as important as many people make it out to be. Hash rate and Bitcoin's long-term inevitable momentum and cycles are much more critical.
Highlights
Global money supply (M2) is a key part of the equation and is correlated with Bitcoin's rise (R2 = 0.89). However, M2 is NOT a leading indicator over the long term.
Miner hash rate (R2 = 0.92) is a much better metric for understanding BTC's fair value and future trajectory. Meanwhile, gold (R2 = 0.71) and the S&P500 (R2 = 0.88) are also helpful but less significant.
But what if we combined all these metrics to create an even more robust model to help us understand Bitcoin’s fair value against these ‘fundamentals’?
Right now, Bitcoin has run up after the US election and is taking a well-earned breather while it lets the long-term trend catch up. It’s prudent to be cautious and not lever up to the gills based on the cries of the hopium pushers who continually forecast BTC will hit $1M or $1T next week. But we’ve also seen Bitcoin run ahead of the ‘fundamentals’ for much longer in bull runs in the past.
A reduction of interest rates and increased liquidity would be bullish for Bitcoin. However, other factors are at play in this cycle, like:
· the possible US Strategic Bitcoin Reserve,
· nation-state game theory and Softwar and
· MSTR’s various products provide easy access to Bitcoin.
How the Global Money Supply Shapes Bitcoin's Trajectory
The chart below (created using data from BGeometrics) shows that the money supply (i.e., Global M2 or global liquidity) and BTC have grown together. When interest rates are lower, more money is created through borrowing, some of which flows into Bitcoin.
While most people attribute the bubbles to the halving cycles, they also tend to line up with the liquidity cycle. With only three previous cycles, it’s hard to tease them apart to fully understand the cause-and-effect relationship.
At the top right of the chart, we can also see that M2 has been declining since the end of September 2024 as governments worldwide have tried to reign in their debt. But despite this, Bitcoin has reached new highs since the US election, with hopes of a clearer regulatory environment.
Using the log-log relationship between M2 and BTC, we can create a formula to estimate BTC price based on M2, as shown in the chart below.
The relationship between M2 and BTC can hint when we’re extended far above the M2 trend or when Bitcoin is oversold, but with an R2 of 0.89, it doesn’t explain everything.
To help us better understand where we’re currently at, the chart below shows the actual vs estimated BTC price ratio using the M2 global money supply.
While we’re definitely above 1, there have been periods when this ratio has gone much higher for much longer.
M2 as a Crystal Ball: Can It Predict Bitcoin's Future?
To understand if M2 is a leading indicator, I’ve run a sensitivity test of R2 and the F-statistic if we assume M2 is a 20-week leading and lagging indicator. The test shows that R2 and F-Stat are maximised with zero lead/lag.
So, unless you want to create clickbait social media posts that drive mass panic and engagement, the best way to understand Bitcoin's fair value is to look at the M2 right now, not 10 weeks ago.
In the past, we could imagine that changes in M2 took a while to flow into the market; however, with high-frequency AI trading algorithms sucking in every piece of available information, any new data today is instantly integrated into trading models. Markets react immediately to any news or rumours about future interest rate changes.
While M2 provides some predictive power, the story doesn’t end there.
Bitcoin Price Prediction: A Multi-Factor Approach
Beyond M2, other factors, such as the hash rate, gold, and the equities market, can help us better understand Bitcoin's fair value.
Why Hash Rate Outshines M2 for Bitcoin Predictions
Hash rate, or the amount of processing power used to mine Bitcoin and protect the network, can be seen as a vote by the miners on how much it’s worth investing in Bitcoin's future.
As BTC increases, they make more money and invest more in mining Bitcoin, which has become super competitive, especially with more nation-states starting to mine Bitcoin with less concern for the cost.
The higher the hash rate, the more secure the Bitcoin network becomes, thus encouraging big money to trust it. This continual process has enabled Bitcoin to grow over 16 years into the most secure network in the world.
As shown in the chart below, we can also use the hash rate to estimate the BTC price, with an excellent R2 of 0.92. While M2 undoubtedly drives the hash rate to some degree, if we want to look at one factor to understand Bitcoin's reasonable price, the hash rate is #1.
Interestingly, the cost of mining Bitcoin turns into a future support level at which the price doesn’t drop below because miners are usually unwilling to sell their Bitcoin for less than their cost to produce it.
Right now, the hash rate is at all-time highs. However, the fair value for Bitcoin based on hash rate alone is below the current price.
How Bitcoin Mirrors the Stock Market
The chart below shows that the S&P500 has risen with Bitcoin, fuelled by increasing M2. When more money is available, it flows into equities and the stock market. This model shows that the equities market is well ahead of Bitcoin’s current price.
As shown in the chart below, there is a VERY high correlation between M2 and the S&P500 (R2 = 0.94). This suggests that borrowed money flows into equities rather than companies creating value to avoid melting in cash.
While M2 massively expanded after COVID-19 from 2020 to 2022, there has been minimal increase in M2 since then to support further equity growth.
Despite the very tight correlation with M2, the share market has pulled way ahead of the fair value supported by M2 in 2024, suggesting that the equities market is much more overvalued than Bitcoin. While this is still the case, it's less likely that the US Fed will lower official interest rates.
Digital Gold vs. Real Gold: Bitcoin’s Price Link
Bitcoin has been referred to as ‘digital gold,’ so we would expect to see some relationship between the price of gold and BTC. When more money is available (due to higher M2) or when people fear inflation or wars, they run to gold as a haven.
As shown in the chart below, we can also use gold to forecast BTC, but with an R2 of 0.73, it’s not great. But if we just look at the bitcoin vs gold model, bitcoin should be higher.
As we’ll see later, when we combine all these factors, gold negatively correlates with Bitcoin’s price.
Bitcoin vs. the Rest: Who’s Growing Faster?
For fun, I’ve calculated each variable's compound annual growth rate (CAGR), showing that hash rate has grown at 120% yearly.
The CAGR of hash rate’s CAGR is closely followed by BTC, which has seen a CAGR of 81% p.a. since the start of 2015. For better or worse, now that Bitcoin has a 2T market cap, the CAGR has stabilised at its lowest levels but is still averaging over 40% p.a.
Hash Rate, M2, Gold, and More: Building the Perfect Model
But what if we could estimate Bitcoin’s price based on all four variables? Considering all four variables, the chart shows the results with an impressive R2 of 0.95.
The table below shows the importance of each variable in the combined equation, with the hash rate being the most significant (higher absolute t-stat) and M2 being the least significant.
Interestingly, when we combine all the factors, gold and bitcoin move against each other to some extent. Investors appear to move into gold in times of high perceived risk (from wars and the like) and back into Bitcoin when they want to protect against inflation risk but aren’t as fearful.
The chart below shows the ratio of the current price vs. the estimated BTC price using all the variables. Right now, we’re a bit above fair value based on all the factors, so it’s prudent to be cautious and avoid excess leverage, but we’ve run a lot higher for longer in the past.
Bullish Momentum: What’s Driving Bitcoin’s Climb?
Over the long term, Bitcoin follows a robust log-log trend (i.e. power law) with cycles. These cycles are usually attributed to Bitcoin halving cycles, as noted earlier, but they also overlap with global liquidity cycles (i.e., M2).
If we project the halving cycles forward, we see that we’re at the start of what should be a traditional bull run.
If history repeats around the halving cycles, we could see Bitcoin reach $340k (the upper power law regression quantile) in late 2025.
The probability of a continued bitcoin bull run in 2025 is also supported by the imminent commencement of a crypto/bitcoin-friendly US administration on 20 January 2025. If the US proceeds with a Strategic Bitcoin Reserve, we could see the front running by other nation-states necessary to fuel this bull run.
However, while the long-term trajectory is solid, the day-to-day functions depend on the news and market participants. Bitcoin is a battle between the traditional fiat system and people who understand/believe that Bitcoin is the future is the future of sound money. There will be many battles, and the war will take time to play out fully.
If global liquidity stays depressed, this bull run could take longer, hopefully with less of a crash on the other side and more of a slower grind upwards.
Why M2 Is Important—but Not All-Important—for Bitcoin
Global M2 is undoubtedly a critical part of the equation, and countries like China and the US have been trying to keep their rates low to curb inflation. But before long, they might have to cave.
Macroeconomics is a deep rabbit hole, and predicting the future is impossible. Reducing interest rates and a bit of money printing will help fuel BTC’s next ascent.
But every cycle is different. This time, Bitcoin has grown so that companies can act as the vehicle to move big money (not just crypto enthusiasts) into Bitcoin, the hardest money.
Bond investors, insurance companies, and retirement funds can now invest in Bitcoin via MicroStrategy’s various products, and a portion of the proceeds will be funnelled into MSTR’s share price.
Going forward, global liquidity will likely continue to be an important factor, but perhaps less so as Bitcoin is seen more as the off-ramp for inflation for the big money rather than just as a speculative investment for retail. This will take time to play out. As always, the data will show the way, but the trend is your friend.
Wrapping It Up: Beyond M2 in the Bitcoin Equation
Global Money Supply (M2) is a factor but is not the only factor that matters for Bitcoin’s price. The table below shows that the hash rate is a more robust predictor of Bitcoin’s trajectory than M2, while the equities market and gold help to add a little more clarity.
So long as M2 stays depressed, it’s wise to be cautious in the short term. But in the long term…
What do you think? Does M2 matter as much as some suggest, or are other factors? Where do you think interest rates and global liquidity are headed?
Share your thoughts below—we’d love to hear your perspective and build the knowledge of the hive mind.