What does the Bitcoin – M2 supply correlation signify in terms of the US dollar?

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Last Thursday, the US dollar jumped ahead of a basket of currencies as data showed that producer prices had increased by the most in more than a decade. In this context, inflationary pressures remain high, and the growing interest in Bitcoin has spawned a slew of additional debates.

Many analysts have considered Bitcoin’s features to work as a hedge during inflation, although its volatility is usually a counter-argument. This article examines BTC’s movement in relation to M1 and M2 supply to determine if there is co-dependence in this area.

 

Is Bitcoin correlated with other non-liquid assets now?

Now, M1 and M2 indicate the monetary growth of the U.S dollar. M1 dictates the growth of liquid cash and coins in circulation in the market, whereas M2 is the broad combination of liquid and non-liquid assets. As M2 encompasses a wider range of assets, it is usually taken as an indicator of total money supply and future inflation.

According to the figure above, the M2 supply and Bitcoin price movements have now aligned over the last year, whereas the US dollar has maintained an inverse relationship with the digital asset. So, for the time being, it can be deduced that Bitcoin maintains control over a broader range of digital assets than just cash.

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While the association with M2 supply should be taken with a grain of salt, its significance grows if the Federal Reserve has no control over Money Supply Growth.

How does inflation pressure factor in?

At the moment, the Feds would want the current inflation rate to be under 2-3% but it is sitting at 5.4%. The global economic landscape was completely disrupted during the initial period of the pandemic and presently, the government would want traditional investors to put their money in the greenback (U.S. dollar).

However, making a case for investment in the U.S dollar, when Bitcoin is tearing ahead in the market is difficult. A rising threat of inflation would only bring down the purchasing power of the U.S dollar, which is again a win-win situation for Bitcoin.

Whether Bitcoin can hold its own during a possible inflation period is difficult to state with any certainty, but a co-dependence with the M2 supply is certainly putting it in the driving seat.

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