Analysis of the Impact of Macroeconomic Factors on Bitcoin Bull Run Prices

Today we discuss how key macroeconomic factors such as global liquidity, interest rates, inflation, and FOMC announcements affect the price trends of Bitcoin during a bull run. By analyzing historical data from 2014 to the present, we aim to identify trends and correlations between these factors and market behavior to provide insights for investment strategies.

Global Market Liquidity

Liquidity is a measure of the availability of cash and easily tradable assets, and it is crucial for a healthy economy. An increase in liquidity drives asset prices up, as more funds flowing into the market promote trading. Periods of high liquidity are typically accompanied by increases in trading volume and prices. Understanding these trends helps investors seize market opportunities and make informed decisions to maximize returns.

Liquidity can be measured by multiple indicators, including:

• Money Market Fund: Reflects the available liquidity in the financial system.
• Bank reserves: Indicate the liquidity available in the banking system for loans and investments.
• Liquidity coverage ratio: A regulatory metric that measures the liquidity health of banks.
• Turnover Rate: Reflects the liquidity level of the stock and bond markets.

This article mainly uses the M2 money supply as a measure. M2 includes physical currency, checking accounts, savings accounts, and other near-money assets, which help to understand the total amount of funds available for spending and investment in the economy.

Historically, the peaks in global M2 growth often coincide with Bitcoin bull runs. The volatility of Bitcoin usually aligns with changes in M2 momentum. During a bull run, monitoring M2 is particularly important, as increased liquidity often drives the market up.

The main bull runs in the cryptocurrency space include:

1. 2011-2013: During the European financial crisis, central banks increased liquidity, and Bitcoin rose from $2.93 to $329.
2. 2015-2017: In a low interest rate environment, Bitcoin rose from $200 to $19,000.
3. 2020-2021: The pandemic stimulus measures significantly increased M2, Bitcoin rose from $10,000 to $64,000.
4. 2024: Despite moderate liquidity, Bitcoin still rises from $25,000 to a new high of $85,000, indicating an increase in market maturity.

It is worth noting that the performance of altcoins differs from that of Bitcoin. Data shows that altcoin/BTC tracks global net liquidity estimates more closely, suggesting that an overall increase in liquidity may be needed to enter a growth phase.

The analysis also found that the dominance of BTC, USDT, and USDC is inversely proportional to the global velocity of money. When the growth rate of money supply exceeds that of GDP, the degree of financialization increases, leading to asset bubbles and a lower dominance of Bitcoin. Conversely, this results in a higher dominance of stablecoins and Bitcoin.

It is advisable to closely monitor macroeconomic policies to grasp future liquidity trends, and to study market sentiment and capital flow in order to predict and position market changes in advance.

Interest Rates and Inflation

Although Bitcoin is designed as a decentralized asset, research shows that it exhibits significant volatility in response to monetary policy events, reacting to interest rate changes and economic outlook. The sensitivity of Bitcoin to central bank decisions evolves over time:

• Before 2013, the Federal Reserve's monetary stimulus significantly lowered Bitcoin prices.
• After 2013, monetary stimulus began to drive up Bitcoin prices, indicating a shift in market perception.
• The ECB's de-inflationary shock has consistently lowered Bitcoin prices, indicating that Bitcoin acts as digital gold in Europe.

The impact of central bank information shocks on Bitcoin differs between the United States and the European Union:

• The Federal Reserve's direct impact lowers Bitcoin prices
• The positive impact of the ECB usually increases Bitcoin prices, peaking in early 2018.

Since 2020, Bitcoin has seen a significant increase in volatility around FOMC announcement weeks, almost immediately reacting to the Federal Reserve's tightening, indicating a stronger correlation with monetary policy decisions. Bitcoin's sensitivity to inflation news has also increased in a high inflation environment.

Conclusion

The relationship between Bitcoin and inflation is complex and constantly evolving, influenced by market maturity and broader economic conditions. Its price dynamics are closely linked to the global liquidity situation, driven by central bank policies, investor behavior, and institutional investment trends.

Research has found that the initial demand for Bitcoin stemmed more from its attributes as a borderless, decentralized digital cash rather than as an inflation hedge. However, the significant decline triggered by the Federal Reserve's tightening after 2020 highlighted speculative motives as well as a broader investor base and acceptance.

For the upcoming CPI data, market expectations remain unchanged. If the actual results fall below expectations again, it may trigger a market reaction. Investors should closely monitor these macroeconomic indicators and make corresponding investment decisions in conjunction with the supply and demand changes of Bitcoin itself.