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

This article will explore how key macroeconomic factors such as global liquidity, interest rates, inflation, and Federal Open Market Committee (FOMC) announcements affect Bitcoin prices during a bull run. We utilize historical data from early 2014 to the present, employing statistical and econometric analysis to identify trends and correlations, providing insights for investment strategies.

Global Market Liquidity

Liquidity is essential for a healthy economy. Increased liquidity drives asset prices up as more funds flow into the market, facilitating fast and stable transactions. During periods of high liquidity, trading volume and prices rise. Understanding these trends helps investors seize market opportunities and make informed decisions to maximize returns.

Liquidity is measured through 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: An important indicator of a bank's liquidity health
• Turnover rate: Indicates the liquidity level of the market.

One of the main metrics we use is the 'M2' money supply. M2 includes all the cash people have on hand and in their bank accounts, covering physical currency, checking accounts, savings accounts, and other near-money assets. Tracking M2 helps to understand the overall liquidity in the economy and the amount of funds available for spending and investment.

Historically, the peak of global M2 growth coincides with the Bitcoin bull run. The volatility of Bitcoin often aligns with changes in M2 momentum. During a bull run, monitoring M2 becomes particularly important, as increased liquidity typically drives the market upward.

The bull run in the cryptocurrency space has provided significant opportunities for investors. Here are some notable bull runs in cryptocurrency history:

First bull run (2011-2013)

• M2 growth: The central bank increased liquidity to stabilize the economy
• Bitcoin reaction: the price surged from $2.93 to $329, reflecting an increased demand for non-traditional financial assets.

Mainstream Popular Bull Run (2015-2017)

• M2 growth: low interest rates and increased money supply continue
• Bitcoin reaction: rose from $200 to $19,000, driven by mainstream media and institutional interest in demand.

New Digital Era Bull Run ( 2020-2021)

• M2 Growth: The COVID-19 pandemic has triggered unprecedented monetary easing and stimulus measures.
• Bitcoin reaction: Price soared from $10,000 to $64,000, as investors seek alternatives to fiat currency.

Recovery and Innovation(2024)

• M2 Growth: Overall liquidity is on a downward trend, but has seen a slight increase since the beginning of 2023.
• Bitcoin reaction: rising from $25,000 to $85,000, indicating an unprecedented level of market maturity.

However, the situation with altcoins is different. Alts/BTC is already tracking global net liquidity estimates. Altcoins may need to see an increase in overall liquidity before entering a growth phase.

The dominance of BTC, USDT, and USDC is inversely proportional to the global money velocity. When the money supply grows faster than GDP, financialization increases, leading to asset bubbles and a lower Bitcoin dominance. Conversely, if GDP grows faster than the money supply, financialization decreases, resulting in a higher dominance of stablecoins and Bitcoin.

We recommend analyzing macroeconomic policies to gain insights into future liquidity trends. Monitor global M2 money supply to understand liquidity changes and their impact on asset prices. Additionally, study market sentiment and attention flow to predict and position for market changes in advance.

Interest Rates and Inflation: Insights from FRED Data and FOMC Announcements

Although Bitcoin is decentralized, it shows significant volatility around monetary policy events, reacting to changes in interest rates and economic outlook. Research shows that Bitcoin reacts to decisions made by the Federal Reserve and the European Central Bank (ECB), with varying effects over time.

After 2013, the monetary shock from the Federal Reserve began to drive up Bitcoin prices, indicating a shift in market perception of Bitcoin. At the same time, the de-inflationary shock from the ECB consistently lowered Bitcoin prices, showing that Bitcoin behaves like digital gold in the face of ECB decisions.

The impact of central bank information shocks on Bitcoin is different in the United States and the European Union. The positive shock from the Federal Reserve tends to lower Bitcoin prices, while the positive shock from the ECB usually increases Bitcoin prices.

Since 2020, the actual volatility of Bitcoin around the FOMC announcement has begun to rise, indicating a closer and more direct correlation with monetary policy decisions. The valuation response of Bitcoin is qualitatively similar to that of other risk assets, but quantitatively stronger.

In the recent CPI release, the sensitivity of Bitcoin's valuation to inflation news has increased. When the inflation rate in the U.S. was 0.0% in May ( month-on-month ), the price of Bitcoin rose along with most other assets. However, when the FOMC attempted to curb liquidity expectations, this initial celebration was quickly corrected.

Conclusion

Bitcoin has attracted great interest as a potential hedge against inflation, but empirical studies yield mixed results regarding its effectiveness. The response of Bitcoin prices to monetary policy announcements has evolved over time, shifting from an initial lagged response to an immediate response after 2020, indicating a closer correlation with monetary policy decisions.

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

These findings suggest that the initial demand for Bitcoin was more due to its use as a borderless, decentralized digital cash rather than as an inflation hedge. However, the sensitive response of Bitcoin prices to Federal Reserve tightening after 2020 highlights speculative motives as well as a broader investor base and general acceptance.

For the upcoming CPI release on Thursday, July 11, 2024, (, the market predicts no significant changes. If the actual results are again below expectations, it may impact the market.

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