Bitcoin's 26% Drop Sparks 'Extreme Fear' Amid Global Liquidity Reassurance

Bitcoin's recent 26% drop from its cycle high has pushed market sentiment into "extreme fear," but a broader perspective on global liquidity trends offers reassurance amid market volatility. In today's economic environment, the money supply plays a significant role in shaping asset prices, particularly for bitcoin, which maintains a strong long-term correlation with global liquidity.

Global liquidity refers to the overall availability of money and credit across the international financial system, affecting capital flows, investment, and asset prices. Central banks, such as the Federal Reserve, European Central Bank (ECB), People’s Bank of China (PBoC), and Bank of Japan (BoJ), play a crucial role in shaping global liquidity conditions. A common measure of global liquidity is Global M2, which includes cash, checking and savings deposits, money market accounts, and smaller time deposits under $100,000, all denominated in U.S. dollars. It serves as a useful proxy for global liquidity, showing the total money readily available for spending, investing, and lending on a global scale.

Bitcoin's price closely follows global liquidity trends. When there is more money available, asset prices tend to rise, and risk assets, including bitcoin, thrive in environments where investors adopt a risk-on strategy. Historically, Bitcoin bull markets have aligned with periods of rapid global liquidity expansion. The year-over-year growth rate of global M2 has demonstrated the strongest correlation with Bitcoin’s price.

While bitcoin generally follows liquidity trends, its price movements also depend on timing, bitcoin-specific events, and its own internal liquidity dynamics. An analysis of bitcoin’s performance between May 2013 and July 2024 shows a 0.94 correlation with global liquidity over the long term. However, when measured using a 12-month rolling correlation, this drops to 0.51, and over a six-month rolling window, it falls further to 0.36. Periods where Bitcoin’s 12-month rolling correlation with liquidity weakens often coincide with significant industry or global events, such as the ICO bubble pop, the COVID-19 sell-off, or the Terra/Luna collapse.

Bitcoin is more than just an asset; it functions as money, with its own internal liquidity cycles. It follows a four-year halving cycle, where miners' rewards for securing the network