Forget the price charts. Here's how bitcoin and S&P 500 look like when adjusted for the money printer
Explore how Bitcoin and the S&P 500 are valued when adjusted for inflation and money supply, revealing deeper insights beyond surface price fluctuations.
When you look at the price of Bitcoin today, it's easy to get lost in the numbers. Currently hovering around $66,000 after a dramatic peak of $126,000 last October, it seems like just another cyclical downturn in the world of cryptocurrency. However, the real story lies beneath these surface-level fluctuations. Have you ever considered how inflation and money supply growth truly impact our understanding of asset valuations?
How Is Bitcoin Valued Against Money Supply?
Recent analysis highlights that when we adjust asset prices for growth in the U.S. M2 money supply, both Bitcoin and the S&P 500 reveal concerning trends. The M2 money supply includes not just cash on hand but also funds in checking accounts, savings accounts, and short-term savings vehicles. As a result, this adjustment presents a more realistic picture of the market.
What Did the M2 Adjustment Reveal?
According to reports, the S&P 500 has only recently returned to its dot-com-era peak when adjusted for M2 growth. While this widespread market index boasts a nominal price nearing an eye-popping 7,511 points, it is crucial to put this figure into perspective. In a money-supply-adjusted context, the S&P 500 merely regained the valuation it held in the year 2000.
This observation prompts us to question the resilience of today's equities. Even though corporate earnings are considered stronger and more stable compared to those prior to the dot-com crash, the reality remains that a quarter-century of money supply expansion was necessary just to bring prices back to the heights of the late '90s.
What Does the BTC/M2 Ratio Say?
Meanwhile, Bitcoin's trajectory paints an alarming picture. Some analysts view Bitcoin as a high-beta gauge for dollar liquidity. The BTC/M2 ratio, which adjusts Bitcoin's price for money supply growth, has shown trouble. Exhibiting a head-and-shoulders pattern—a common bearish signal—this ratio indicates that Bitcoin’s exponential growth is cooling off, implying that it could have diminishing returns in comparison to the burgeoning money supply.
Why Should This Matter to Investors?
If Bitcoin, often seen as a leading indicator for broader market sentiment, is losing ground to the M2 growth, alarm bells should ring for investors. What does it mean when the most liquidity-sensitive asset shows signs of weakness? It could indicate that the S&P 500's nominal gains are propped up by an unstable foundation. Whether this results in actual weakness in equities is yet to be determined, but caution might be warranted.
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Are We Witnessing Monetary Exhaustion?
The concept of "monetary exhaustion" has been spotlighted by some analysts, suggesting that the excess liquidity has led to inflated asset valuations, both for Bitcoin and equities. As such, if Bitcoin struggles to outpace the growing money supply, it may signal broader challenges ahead for risk assets. Ultimately, it appears that a significant recalibration may lie in the horizon.
Key Takeaways
- Bitcoin is currently priced at around $66,000, significantly down from its peak of $126,000.
- The S&P 500 has only recently regained its dot-com-era valuation when adjusted for M2 money supply growth.
- The Bitcoin-to-M2 ratio shows potential bearish signals indicating weakening valuation performance against liquidity growth.
- Investors should remain cautious as monetary conditions change and consider leveraging competitive crypto exchange platforms.