The markets may appear stable, but a closer look reveals a fascinating story. Bitcoin's price has halved from its peak, and the S&P 500 hovers near record highs. However, when we adjust these prices for the U.S. M2 money supply, a different picture emerges. This M2 money supply, which includes cash, checking accounts, and short-term savings, is crucial in understanding the true value of these assets.
Bitcoin, often seen as a barometer for dollar liquidity, is now flashing a warning sign. The BTC/M2 ratio, which measures bitcoin's price relative to the money supply, has formed a head-and-shoulders pattern, a bearish signal. This suggests that bitcoin's exponential growth over the money supply may be slowing down, at least for now. This is significant because it implies that the asset's ability to outpace the influx of new dollars is diminishing.
The S&P 500, too, tells a different story when adjusted for M2 growth. Nominally, it's near record highs, but in terms of monetary value, it's only recently reclaimed its 2000-era peak. This indicates that the index's valuation has been supported by a quarter-century of money-supply expansion, with each new dollar contributing less to the overall gain. This raises questions about the sustainability of the S&P 500's nominal gains.
The implications are far-reaching. Bitcoin's monetary valuation losing ground to M2 growth could be an early warning sign for the broader market. If the S&P 500's nominal gains are built on a weaker foundation, it may face challenges. As the most liquidity-sensitive asset, bitcoin's struggle against the dollar supply could impact the risk-on world.
In my opinion, this analysis highlights the importance of considering the money supply when evaluating asset prices. It's a reminder that what meets the eye may not always reflect the true health of an investment. As we navigate these markets, a deeper understanding of the underlying factors, such as the M2 money supply, is essential for making informed decisions.
