The major influence of global M2 money supply on crypto markets

In the early days, Bitcoin and crypto market cycles were heavily influenced by halving events. These occur approximately every four years, or every 210,000 blocks, when the block reward for miners is halved.

The next one will come on May 5, 2024, reducing the reward to 3,125 BTC from the current 6.25 BTC.

However, there may be larger influences across Bitcoin and crypto markets in terms of the M2 money supply. This metric appears to be highly correlated with market movements over the past decade.

Global Macro Investor founder and CEO Raoul Pal posted a chart comparing global deviation from trend of M2 money supply versus crypto market capitalization on July 22nd to illustrate.

Ok, two more charts and some thoughts… this time about crypto….

Is the accepted narrative of the BTC Halving cycle driving the BTC cycle (and all crypto) or is it the macro?

I’m starting to think it’s all about the macro

This is global market cap for M2 YoY vs Crypto #Bitcoin pic.twitter.com/sSB7CaVFdE

— Raoul Pal (@RaoulGMI) 21 July 2022

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The M2 money supply, also referred to as the “M2 Money Stock”, is a measure of the amount of currency in circulation. It includes M1 money, which is physical cash and deposits, as well as currency that is “less liquid”, such as bank savings accounts.

Growth rates in the M2 money supply have fallen this year as inflation has increased. Pal commented that falling demand for crypto had caused the outflow, adding:

“It suggests that liquidity and currency depreciation are the dominant drivers, as opposed to supply.”

It is also natural that more caution will be exercised with less money available to investors, especially with high-risk investments such as crypto. The cost of living crisis has exacerbated this in 2022, with most countries facing multi-decade inflation highs and high prices for consumer goods, fuel and energy.

Pal commented that global M2 growth is turning around. “Early days, but crypto is future-oriented and turns earlier than most assets as its such a long duration,” he added.

Crypto bears are still lurking

Crypto markets have indeed turned around in the last week or so, but it’s still early days and bear markets are usually long-lasting affairs. Over the past seven days, the crypto market capitalization has grown by 15%, reaching $1.1 trillion.

However, markets are still down nearly 70% from their November highs last year, and the current rally could be dead-cat-flavored.

Two key events next week in the US could send crypto south quickly. The Federal Reserve is expected to raise interest rates again, which is generally bad news for risk assets.

In addition, the US Bureau of Economic Analysis (BEA) is set to release its advance estimate for second-quarter GDP (gross domestic product) growth on July 28. Two negative quarters in a row would mean a recession, which would also have a negative impact on the crypto markets.