Last Thursday, the US dollar surged ahead of a basket of currencies after data suggested that producer prices had seen their largest annual rise in more than 10 years. Inflationary pressures remain strong in this regard, and over time, the increased interest in Bitcoin has led to many other discussions.
Many analysts have thought that Bitcoin’s properties act as a hedge during inflation, but its volatility factor usually acts as a counter-argument. To understand if there is co-dependency in this area, this article analyzes the movement of BTC in relation to M1 and M2 supply.
Is bitcoin now correlated with other illiquid assets?
M1 and M2 now indicate the monetary growth of the US dollar. M1 determines the growth of liquid cash and coins in the market while M2 is the broad combination of liquid and illiquid assets. Because M2 encompasses a wider range of assets, it is typically used as an indicator of total money supply and future inflation.
Now, according to the graph above, it can be observed that the M2 supply and Bitcoin price movements have conceded over the past year, while the US dollar continued to have an inverse relationship to the digital asset. So for now, it can be concluded that Bitcoin is in control of a wider list of digital assets than just cash.
While the correlation with M2 supply is to be used with caution, its importance increases when money supply growth is not under the control of the Federal Reserve.
What are the effects of inflationary pressures?
For now, the Feds want the current inflation rate to be below 2-3%, but it is 5.4%. The global economic landscape was completely disrupted in the early stages of the pandemic and currently the government wants traditional investors to put their money in the greenback (US dollar).
However, it is difficult to argue in favor of investing in the U.S. dollar as Bitcoin advances in the market. An increasing risk of inflation would only reduce the purchasing power of the US dollar, which in turn is a win-win situation for Bitcoin.
Whether Bitcoin will hold its own during a possible inflationary period is difficult to say for sure, but a codependency with the M2 supply certainly puts it in the driver’s seat.