Raoul Pal, the founder of Global Macro Investor, has recently highlighted an intriguing correlation between bitcoin’s price movements and the global M2 money supply. His analysis reveals that since the beginning of 2023, bitcoin has shown a consistent pattern, aligning itself with global M2 trends with a notable 12-week delay. This observation posits that shifts in liquidity conditions tend to affect the cryptocurrency market after approximately three months. Based on this correlation, Pal forecasts that bitcoin could be poised to approach $200,000 by the end of 2025, assuming the relationship persists.
However, there’s a significant twist in this narrative. As of July 16, this correlation has begun to break down. While the global M2 supply has continued its upward trajectory, indicative of a global trend towards monetary expansion, bitcoin’s price has stagnated, displaying a sideways trend through the summer months. This deviation has puzzled many, given the historical correlation between bitcoin and liquidity conditions.
Diving deeper, Pal attributes this disruption not to a failure of his analytical model, but to actions taken by the U.S. Treasury concerning its Treasury General Account (TGA). This account serves as the government’s primary operating account at the Federal Reserve, enabling it to manage tax revenues, bond sale proceeds, and federal expenditures. When the Treasury attempts to replenish the TGA by issuing bonds beyond immediate needs, it effectively siphons liquidity from the financial system, subsequently decreasing the capital available for riskier assets such as cryptocurrencies.
Since July, the Treasury has reportedly issued around $500 billion in bonds to bolster the TGA, resulting in its balance surging to nearly $800 billion—marking a multi-year high. Pal argues that this significant drawdown has particularly impacted liquidity-sensitive assets like bitcoin, accounting for its muted performance despite the rising global M2 supply.
Looking ahead, Pal expresses optimism that the TGA’s balance is now sufficiently restored, suggesting that this liquidity drain may be coming to an end. Should this be the case, conditions could normalize, allowing bitcoin’s anticipated upswing—rooted in its historical correlation with global M2—to resume.
Yet, some analysts present a counterpoint. Notably, technology stocks and gold have recently achieved new all-time highs, indicating that broader market risk appetite remains robust. This resilience in other assets raises questions about the potential reasons behind bitcoin’s underperformance. Some suggest that the apparent disconnection from M2 could also stem from substantial selling pressure on long-held bitcoin, contributing to the misalignment between its price and the supply of global liquidity.
