Bitcoin’s decline from its historical peak raises the question: Is the rally driven by Trump’s election victory fading? Or are there more significant factors at play beyond the election-related sentiment?

This week, MacroMicro's Chart of the Week delves into the long-term dynamics, uncovering how monetary policies from the world’s top four central banks are subtly yet powerfully driving this crypto resurgence.

I. Bitcoin vs. Fiat Currency

The most significant characteristic of Bitcoin is its "limited supply." Initially, Bitcoin set a rule of halving miners' rewards approximately every four years, resulting in a total supply converging to 21 million. This scarcity of Bitcoin resembles the characteristic to gold. In contrast, fiat currency is controlled by a country's central bank, and its quantity is nearly unlimited. Central banks freely regulate the money supply based on inflation and economic development. For instance, in the face of the 2020 global pandemic crisis, major central banks engaged in unprecedented large-scale easing.

II. Major Central Banks Money Supply M2

Bitcoin often experiences an uptrend when there is an expansion in the global central bank money supply. Given its inherent feature of having a "limited supply," Bitcoin's value typically sees an uplift when there is ample liquidity in the market.

Bitcoin tends to perform well when there is an increase in the annual money supply. Examples include the 2008 financial crisis, the European Central Bank's deflationary period in 2016, and the COVID-19 pandemic in 2020 when the Fed initiated quantitative easing (QE). Particularly during the 2020 crisis, major central banks rapidly expanded their balance sheets, with the Fed alone increasing its balance sheet by 73%, contributing to a remarkable surge in Bitcoin prices.

On the flip side, when the annual money supply decreases, Bitcoin tends to underperform. Examples include the end of the United States' QE since the 2007–2008 financial crisis, and the Fed's initiation of an interest rate cycle to curb high inflation at the end of 2021. In these instances, Bitcoin prices noticeably declined.

Takeaway

To better capture Bitcoin's price fluctuations, it's essential to look beyond market sentiment and fund movements. A deeper understanding of the fundamentals, particularly examining fiat supply, reveals a consistent positive correlation between Bitcoin prices and the fiat supply.

Looking ahead, with over 65% of global central banks entering an interest rate reduction cycle in 2024—a trend expected to continue into 2025—an increase in money supply is likely to drive upward momentum for Bitcoin. We encourage users to regularly monitor this chart, as it provides valuable insights for making informed Bitcoin investment decisions.

MacroMicro has introduced a cryptocurrency section, providing diverse insights to examine Bitcoin's fundamentals. We extend a warm invitation to users to join us in tracking and comprehending the intricacies of Bitcoin's fundamental aspects!

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