We may be standing at a historic turning point in the global capital landscape. As the global M2 money supply surpasses a historic high of $112 trillion, the US dollar index falls below the critical level of 100, and central banks around the world continue to reduce their holdings of US Treasuries while increasing their gold reserves, a profound asset repricing is quietly taking place. In this transformation, Bitcoin is completing a stunning transition from a marginal speculative asset to a systematic financial tool, and is expected to become the core engine driving this bull market.
Looking back at financial history, the rise and fall of asset prices has always been closely linked to liquidity cycles. We are currently at the starting point of a new round of global liquidity expansion, and the correlation between Bitcoin and liquidity is significantly strengthening. Data shows that the price of Bitcoin has a high correlation of 0.94 with the global M2 growth rate, a figure that far exceeds traditional assets like gold and stocks. This correlation is not coincidental but is determined by Bitcoin's unique monetary attributes and scarcity.
Reflecting on the past three key cycles: during the global M2 contraction from 2014 to 2015, Bitcoin experienced an 18-month bear market, with its price dropping from $1,150 to below $200, a decline of over 80%. In the liquidity improvement phase from 2016 to 2018, Bitcoin entered its first bull market driven by institutional funds, with its price soaring from $400 to $20,000, creating a 50-fold investment return. During the global monetary expansion in 2020-2021 due to the pandemic, Bitcoin surged parabolically from $3,000 to a historic high of $69,000.
The current liquidity environment we face is different from the past. On one hand, central banks of major global economies continue to maintain a loose policy orientation; on the other hand, the economic structure is undergoing profound changes. The booming development of artificial intelligence and automated investments is significantly enhancing production efficiency, with corporate capital expenditures replacing consumer spending as the main engine of economic growth. From Meta's announcement of a $600 billion investment in the metaverse over the next five years to tech giants like Microsoft and Google investing over $100 billion annually in AI research and development, these capital expenditures not only drive technological progress but also change the pricing logic of asset prices.
This new pattern of "strong capital, weak labor" creates an ideal environment for risk assets. Weak employment data lowers inflation expectations, making it likely for the Federal Reserve to cut interest rates ahead of schedule, while the productivity gains from corporate capital expenditures support profit expectations. This unique combination provides a rare macro environment for growth assets like Bitcoin.
The global monetary system is undergoing profound changes. The US dollar index has fallen below the critical level of 100, marking the longest consecutive decline since the collapse of the Bretton Woods system in 1973. Meanwhile, the proportion of US dollars in global central bank foreign exchange reserves has decreased from 72% in 2000 to the current 58%, while the share of gold and other non-traditional reserve assets continues to rise. Over 76% of central banks indicate they are actively seeking to diversify their asset allocations, a trend that has accelerated further after the Russia-Ukraine conflict.
In-depth analysis shows that this transformation stems from the inherent contradictions of the dollar system. The scale of US government debt has surpassed $34 trillion, with annual interest payments exceeding $1 trillion, and continuing to grow at a rate of $100,000 per second. This debt pressure has put the Federal Reserve in a policy dilemma: maintaining high interest rates will exacerbate the debt burden and could lead to a fiscal crisis; cutting interest rates could reignite inflation and damage the dollar's credibility.
This predicament is triggering a reallocation of global assets. The traditional 60/40 stock-bond allocation model is facing challenges, with this strategy recording its worst performance in 40 years in 2022. Institutional investors are seeking new hedging tools, and Bitcoin, with its unique attributes, is gaining favor. Since the approval of spot ETFs, monthly institutional inflows into Bitcoin have repeatedly hit new highs, with the involvement of traditional asset management giants like BlackRock and Fidelity marking Bitcoin's transition from "digital gold" to an institutionally allocated asset.
Notably, the correlation between Bitcoin and gold is undergoing interesting changes. Before 2020, their correlation was close to zero, but after 2022, it has significantly increased to above 0.6. This indicates that the market is incorporating Bitcoin into the category of anti-inflation assets, but its volatility is significantly higher than that of gold, exhibiting characteristics of "high beta gold."
The revaluation of Bitcoin's value is not only due to changes in the macro environment but also benefits from the rapid development of its own ecosystem. From a technical perspective, the capacity of the Lightning Network has grown by 300% over the past two years, significantly enhancing transaction processing capabilities; the Taproot upgrade has improved transaction privacy and efficiency; the refinement of sidechains and layer-two solutions has further expanded application scenarios.
From a regulatory perspective, 2023 has become a turning point for Bitcoin regulation. The US SEC approved spot ETFs, the EU passed the MiCA regulatory framework, and Japan revised its fund settlement law, clearing obstacles for institutional participation. Currently, over 400 listed companies have included Bitcoin in their balance sheets, including well-known firms like MicroStrategy and Tesla.
The significant increase in institutional participation is changing the funding structure of the market. In the first quarter of 2024, net inflows into Bitcoin ETFs reached $12 billion, more than ten times that of gold ETFs. This influx of funds not only provides liquidity support but also changes the price discovery mechanism. Data shows that ETF investors have a significantly longer holding period than retail investors, with an average holding time exceeding six months, which reduces market volatility.
We are witnessing a deep transformation of the financial paradigm. The traditional investment framework is based on a dollar-based system and sovereign credit currency system, but the rise of digital assets is constructing a new pricing system. In this new system, Bitcoin, with its unique attributes, is becoming an important value storage tool.
From a valuation perspective, Bitcoin's market capitalization is currently about $1.3 trillion, only equivalent to 10% of gold's market value and 1.1% of global M2. If its market capitalization share rises to 20% of gold, the corresponding price would exceed $150,000; if it captures 3% of global M2, the price could reach $300,000. This valuation reconstruction is not a fantasy but is based on its unique scarcity (a cap of 21 million coins) and increasingly enhanced monetary function.
More importantly, Bitcoin is becoming a new barometer of liquidity. Its price movements often lead other risk assets by 3-6 months, which is related to its high sensitivity to changes in liquidity. When global liquidity expands, Bitcoin typically rises first; when liquidity contracts, it also adjusts first. This characteristic makes it an important indicator for observing global capital flows.
Looking ahead to 2025, several catalysts may drive Bitcoin to achieve a revaluation. First, the initiation of the Federal Reserve's interest rate cut cycle will release a large amount of liquidity; historical data shows that during interest rate cut cycles, Bitcoin's average increase exceeds 200%. Second, the policy environment after the US presidential election may be more favorable, as the current government has shown an open attitude towards digital assets. Third, institutional adoption continues to accelerate, with traditional financial institutions like pension funds and insurance companies considering allocations to digital assets.
In this era where liquidity determines fate, Bitcoin may be becoming the new anchor for asset pricing. It is not only a product of technological innovation but also a response to the flaws of the traditional monetary system. As global liquidity continues to expand, the transformation of the dollar system accelerates, and the Bitcoin ecosystem matures, this digital asset is completing a historic leap from the margins to the mainstream. Investors need to transcend traditional asset classification frameworks and understand this ongoing financial revolution from a new perspective. In future asset allocations, Bitcoin is likely to no longer be an optional alternative but an indispensable core component.
Related: Bitcoin (BTC) breaks through $112,000, but derivatives data shows traders remain cautious.
Original article: “Liquidity Tsunami and Asset Revolution: Why Bitcoin (BTC) Will Lead the Year-End Bull Market?”
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