The relationship between Bitcoin and the global money supply

Many people believe that bitcoin’s price is mainly driven by the halving or by growing adoption. In reality, there is a more fundamental force at play: the global money supply. The more money circulates in the economy, the stronger the demand for something truly scarce becomes.

The global money supply is simply the amount of money available in the economy. Central banks control it by adjusting interest rates or by creating more money. Since the financial crisis of 2008, this money tap has been opened further and further. The result is that every euro or dollar gradually loses part of its purchasing power.

Bitcoin works in the opposite way. Where the money supply can grow indefinitely, the maximum number of bitcoins is forever capped at 21 million. That makes bitcoin predictable and scarce. And it is precisely this contrast that explains why bitcoin’s price moves so closely with the money supply. When more money is created, the demand for an alternative that cannot be inflated grows.

The connection is clearly visible in the data. The correlation between the global money supply and bitcoin’s price is around 0.94, an exceptionally high level. You also see that changes in the money supply often show up in bitcoin’s price with a delay of several months.

There is another important point. The global money supply will likely need to keep expanding in the future, simply because heavily indebted countries would otherwise not be able to service the interest on their debt. This makes monetary expansion a given, and it only strengthens bitcoin’s role as a scarce digital alternative.