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

Today we explore how key macroeconomic factors such as global liquidity, interest rates, inflation, and the Federal Open Market Committee (FOMC) announcements impact 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.

Data Source

We have collected the following data from authoritative sources:

• Interest Rate: U.S. Federal Reserve Economic Data ( FRED )
• Inflation: U.S. Bureau of Labor Statistics ( BLS )
• Market Price: Historical prices of stocks and Bitcoin in the financial database
• FOMC Announcements/News: Federal Reserve announcements and news archives, as well as U.S. Treasury press releases.

Global Market Liquidity

Liquidity, or the availability of cash and easily tradable assets, is crucial for a healthy economy. Increased liquidity drives asset prices up as more funds flow into the market, facilitating quick and stable transactions. During periods of high liquidity, trading volumes 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 funds: A good indicator of the available liquidity in the financial system.
• Bank reserves: The reserves held by banks at the central bank indicate the liquidity situation.
• Liquidity coverage ratio: An important indicator of a bank's liquidity health.
• Turnover rate: The turnover rate of stocks and bonds indicates the liquidity of the market.

However, one of the main metrics we use is the 'M2' money supply. M2 includes all cash on hand and in bank accounts, covering physical currency, checking accounts, savings accounts, and other near-money assets. Tracking M2 helps us 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. What matters is not only the amount of currency in circulation but also the rate of change in the money supply. 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 up, making more funds available for investment, thereby pushing up asset prices.

The bull run in the cryptocurrency space provides significant opportunities for investors. Some notable bull runs in history include:

• The first bull run (2011-2013): Bitcoin price surged from $2.93 to $329, reflecting an increase in demand for non-traditional financial assets.
• Mainstream popular bull run(2015-2017): Bitcoin rose from $200 to $19,000, further driven by mainstream media and institutional interest in its demand.
• New Digital Era bull run (2020-2021): Bitcoin price skyrocketed from $10,000 to $64,000, as investors sought alternatives to fiat currency.
• Recovery and Innovation (2024): Bitcoin reached a historic high, rising from $25,000 to $85,000.

However, the situation with altcoins is different. We may need to see an overall increase in liquidity before altcoins enter a growth phase.

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

Interest Rates and Inflation

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

Before 2013, the monetary shocks from the Federal Reserve significantly lowered Bitcoin prices. However, after 2013, these shocks began to push Bitcoin prices up, indicating a change in market perception of Bitcoin. At the same time, the ECB's de-inflation shocks consistently lowered Bitcoin prices, indicating that Bitcoin is behaving like digital gold in the face of ECB decisions.

Starting from 2020, the actual volatility of Bitcoin began to rise around the FOMC announcement weeks, especially after the outbreak of the COVID-19 pandemic at the end of 2020. The price of Bitcoin reacted almost immediately to the Fed's tightening, indicating a closer and more direct correlation with monetary policy decisions.

In the recent CPI release, we observed that the valuation of Bitcoin has become more sensitive to inflation news in the high inflation environment post-2020. When the U.S. inflation rate was 0.0%( month-on-month) in May, 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 significant interest from investors and scholars as a potential hedge against inflation. However, empirical studies have yielded mixed results regarding its effectiveness in this role.

Initially, Bitcoin prices showed no significant reaction to monetary policy announcements. Until 2019, any response typically took months to materialize. However, since 2020, Bitcoin prices have begun to decline immediately after the Federal Reserve's tightening, indicating a closer and more direct correlation with monetary policy decisions.

Evidence suggests that the relationship between Bitcoin and inflation is complex and evolving, influenced by market maturity and broader economic conditions. However, the price dynamics of Bitcoin are closely tied to the global liquidity situation, 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, after 2020, the significant drop in Bitcoin prices following the Federal Reserve's tightening highlighted speculative motives as well as a broader investor base and general acceptance.

For the upcoming CPI release, the market predicts no significant changes. If the actual results fall short of expectations again, it may impact the market.