Bitcoin's Price Tied to 90% Global Liquidity Growth

Bitcoin's price has been closely tracking global liquidity growth, with analysts noting a strong correlation between the two. According to Raoul Pal, the founder of Global Macro Investor, liquidity explains up to 90% of Bitcoin's price movements. This relationship is driven by the expanding money supply, which is fueled by increasing debt levels in many countries. Pal's analysis suggests that the current bullish narrative for Bitcoin is supported by rising liquidity, despite concerns about recession risks and geopolitical tensions.

Pal frames the issue in personal finance terms, noting that there is an 11% "hidden tax" composed of 8% currency debasement and 3% global inflation. He argues that if individuals are not earning more than 11% per year, they are effectively getting poorer. Bitcoin, which has returned an average of 130% annually since 2012, is seen as one of the most asymmetric bets of the past decade, outperforming the Nasdaq by over 99%.

Global liquidity is driven by the expansion of the money supply, which is primarily based on ever-growing debt levels. This structural expansion is not linear and fluctuates based on specific drivers. Michael Howell, author of “Capital Wars,” identifies three main drivers currently impacting global liquidity: the US Federal Reserve, the People’s Bank of China, and banks lending through collateral markets. Indirect influences, such as the world business cycle, oil prices, dollar strength, and bond market volatility, also play a role with a lag of 6 to 15 months.

Howell believes that global liquidity moves in roughly five-year cycles and is now on the way to its local peak. He projects the current cycle to mature by mid-2026, reaching an index level of around 70. This would mark a turning point, with a subsequent downturn being a likely outcome. The recent growth in global liquidity is driven by the rapidly weakening world economy, which is likely to prompt further easing by central banks. The People’s Bank of China has already begun injecting liquidity into the system, while the Fed faces a tough choice between fighting inflation and supporting the financial system.

Economic uncertainty is driving up US Treasury yields and fueling bond market volatility, both indicators of collateral scarcity and tightening credit conditions. These pressures are likely to become headwinds for liquidity expansion. Meanwhile, a looming recession is expected to weaken investor risk appetite, further draining liquidity from the system. Even if a downturn lies ahead in 2026, global liquidity still has room to run, at least through 2025. This matters for Bitcoin, as the likely policy response of 'more liquidity' establishes the upward path of persistent monetary inflation that underpins hedges such as gold, quality equities, prime residential real estate, and Bitcoin.

Howell's liquidity cycle roughly aligns with Bitcoin's four-year halving cycle, pointing to a potential peak in late 2025 and early 2026, respectively. If history rhymes again, this convergence could set the stage for a major price move in Bitcoin. However, it is important to note that every investment and trading move involves risk, and readers should conduct their own research when making a decision.