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

Today we will explore how key macroeconomic factors such as global liquidity, interest rates, inflation, and FOMC announcements affect the price performance 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, providing insights for investment strategies.

Global Market Liquidity

Liquidity is key to a healthy economy, representing the availability of cash and easily tradable assets. Increased liquidity drives asset prices up as more funds flow into the market, promoting active trading. Periods of high liquidity are usually accompanied by increases in trading volume and prices. Understanding these trends helps investors seize market opportunities and make informed decisions to maximize returns.

Indicators for measuring liquidity include:

• Money Market Fund: Reflects the available liquidity in the financial system.
• Bank reserves: Indicate the liquidity available in the banking system to support loans and investments.
• Liquidity Coverage Ratio: Measures the liquidity health of banks
• Turnover rate: reflects the level of market liquidity

We mainly use the M2 money supply as a measure. M2 includes cash in circulation and various bank deposit accounts, reflecting the amount of funds available for spending and investment in the overall economy.

Historically, the peaks in global M2 growth have often coincided with Bitcoin bull runs. The rate of change in M2 is particularly important, as Bitcoin's fluctuations are usually in line with changes in M2 momentum. During a bull run, monitoring M2 becomes more critical because increased liquidity often drives the market up.

Bitcoin Historical Bull Run Review

Bitcoin has experienced several significant bull runs:

1. 2011-2013: During the European financial crisis, central banks increased liquidity to stabilize the economy. Bitcoin rose from $2.93 to $329, reflecting an increase in demand for non-traditional financial assets.

2. 2015-2017: Low interest rates and increased money supply continued. Bitcoin rose from $200 to $19,000, gaining mainstream attention.

3. 2020-2021: The COVID-19 pandemic triggered unprecedented monetary easing. Bitcoin rose from $10,000 to $64,000 as investors sought alternatives to fiat currency.

4. 2024: Despite the overall decline in liquidity, Bitcoin still rises from $25,000 to a new high of $85,000. This indicates that the Bitcoin market is maturing and is no longer entirely reliant on a surge in liquidity.

However, the situation for altcoins is different. Alts/BTC is still tracking the global net liquidity estimates, and an overall increase in liquidity may be needed to enter the growth phase.

Analysis shows that the dominance of BTC, USDT, and USDC is inversely proportional to the global velocity of money. When the growth of money supply outpaces GDP, financialization increases, leading to asset bubbles and lower Bitcoin dominance. Conversely, the opposite is true.

The Impact of Interest Rates and Inflation

Despite being designed as decentralized, Bitcoin exhibits significant volatility in response to monetary policy events. Research has found that Bitcoin's sensitivity to decisions made by the Federal Reserve and the European Central Bank varies over time:

• Before 2013, the Federal Reserve's monetary shocks lowered Bitcoin prices. After 2013, it began to push prices up.
• The European Central Bank's anti-inflation impact has consistently lowered Bitcoin prices.
• The Federal Reserve's positive impact lowers Bitcoin prices, while the European Central Bank's positive impact increases prices.
• After 2020, the actual volatility of Bitcoin in response to FOMC announcements increased, almost immediately reacting to the Federal Reserve's tightening.

When the latest CPI data was announced, Bitcoin also showed an immediate reaction. In May, when the U.S. inflation rate was 0.0%, the price of Bitcoin briefly rose, but was then corrected by the FOMC's efforts to suppress liquidity expectations.

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 related to global liquidity conditions, driven by central bank policies, investor behavior, and institutional investment trends.

After 2020, the price of Bitcoin fell sharply after the Federal Reserve tightened, highlighting the speculative motives as well as a broader investor base and widespread acceptance. The sensitivity of Bitcoin to monetary policy decisions has significantly increased, and its valuation response is similar to other risk assets, but to a greater extent.

For the upcoming CPI release, market expectations have not changed significantly. However, if the actual results are again below expectations, it may trigger a market reaction. Investors should closely monitor these macroeconomic indicators to better understand and predict the trends in the Bitcoin market.