Key takeaways:
-
Bitcoin’s price closely tracks global liquidity growth, with liquidity explaining up to 90% of its price movements, according to Raoul Pal.
-
In the long term, global liquidity continues to expand, driven by the increasing debt levels in many countries.
-
On a shorter timeframe, global liquidity follows a cyclical pattern, with Michael Howell projecting the current cycle to peak by mid-2026.
Bitcoin (BTC) price is notoriously sensitive to global liquidity. Some analysts go as far as calling their correlation near-perfect, with a lag of about three months. This relationship is fueling the current bullish narrative as BTC price soars back above $100,000, but how long can this trend last?
Liquidity is Bitcoin’s silent price driver
Raoul Pal, the founder of Global Macro Investor, recently gave a speech on the strong correlation between Bitcoin and global M2 liquidity. In a recap posted by Paul Guerra, Pal’s message refers to: despite looming concerns — recession risks, geopolitical tensions, and other global stressors — rising liquidity as the dominant force behind asset price action.
According to Pal, expanding liquidity backs up to 90% of Bitcoin’s price action and as much as 97% of the Nasdaq’s performance. Indeed, a chart comparing global M2 (with a 12-week lead) and Bitcoin’s price shows an almost uncanny alignment.
Pal also frames the issue in personal finance terms. He says there’s an 11% “hidden tax” on all of us, composed of 8% currency debasement and 3% global inflation. He notes,
“If you’re not earning more than 11%/yr, you’re getting poorer by definition.”
Bitcoin has returned an average of 130% annually since 2012, despite dramatic drawdowns. That makes it one of the most asymmetric bets of the past decade — and it’s outperformed the Nasdaq by over 99%.
What drives global liquidity?
At its core, global liquidity is fueled by expanding the money supply. As independent investor Lyn Alden puts it,
“Fiat currency systems are primarily based on ever-growing debt levels. The money supply continuously grows in every country for this reason.”
This offers a high-level view of global liquidity and suggests its long-term expansion is structural. However, this growth isn’t linear. Over shorter time frames, it 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 (PBoC), and banks lending through collateral markets.
Howell also points to indirect influences that act with a lag of six to 15 months. These include the world business cycle, oil prices, dollar strength, and bond market volatility. A weak global economy and a softening dollar typically boost liquidity. But rising bond volatility tightens collateral supply and chokes lending, undermining liquidity.
Related: New bull cycle? Bitcoin’s return to $100K hints at ‘significant price move’
How long will global liquidity rise?
Michael 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 (below the post-COVID index of 90). That would mark a turning point, with a subsequent downturn being a likely outcome.
The recent growth in global liquidity stems from 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.
The Fed now faces a tough choice: continue fighting inflation or pivot to support an increasingly fragile financial system. At its May 7 meeting, rates were held steady, but the pressure on Chair Jerome Powell is mounting, especially from US President Donald Trump.
At the same time, economic uncertainty is driving up US Treasury yields and fueling bond market volatility, both indicators of collateral scarcity and tightening credit conditions. Over time, 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. And that matters for Bitcoin.
Howell notes,
“The likely inevitable policy response of ‘more liquidity’ is a great future omen. It establishes the upward path of persistent monetary inflation that ultimately underpins hedges such as gold, quality equities, prime residential real estate, and Bitcoin.”
Interestingly, Howell’s liquidity cycle roughly aligns with Bitcoin’s four-year halving cycle. The former points to a potential peak in late 2025, and the latter in early 2026. If history rhymes again, that convergence could set the stage for a major price move.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
