In recent developments, Bitcoin has experienced a 26% drop from its all-time high for this cycle, plunging market sentiment into "extreme fear." However, the broader perspective provided by global liquidity trends offers a reassuring outlook amidst this volatility. The relationship between Bitcoin and global liquidity is significant, with long-term correlations suggesting that Bitcoin's price movements are closely tied to the availability of money and credit in the international financial system. This article delves into how global liquidity influences Bitcoin's performance and what this means for investors.

Global liquidity, defined as the overall availability of money and credit across international financial markets, plays a crucial role in shaping asset prices. Central banks, including the Federal Reserve, European Central Bank (ECB), People’s Bank of China (PBoC), and Bank of Japan (BoJ), influence these conditions through interest rates and monetary policies. A common metric used to gauge global liquidity is Global M2, which encompasses various forms of readily available funds such as cash, deposits, and short-term investments denominated in U.S. dollars.

The correlation between Bitcoin's price and global liquidity is particularly strong over the long term, with a 0.94 correlation observed over several years. Shorter-term variations can be influenced by specific market events or internal liquidity dynamics within the Bitcoin ecosystem. For instance, Bitcoin's halving cycle, where miners' rewards are halved every four years, tends to drive market enthusiasm and subsequent corrections. Additionally, metrics like the Market Value to Realized Value (MVRV) ratio provide insights into Bitcoin's valuation relative to historical acquisition costs, signaling potential overvaluation or undervaluation.

Historically, periods of rapid global liquidity expansion have aligned with Bitcoin bull markets. Data shows that the year-over-year growth rate of global M2 has had a strong correlation with Bitcoin's price. However, there have been instances where this correlation weakened due to significant industry or global events, such as the ICO bubble burst, the COVID-19 sell-off, or the Terra/Luna collapse. During these times, internal market dynamics—such as profit-taking and panic selling—become more influential than broader liquidity conditions.

Looking ahead, continued global liquidity expansion suggests a positive outlook for Bitcoin. Since early 2025, global M2 has grown by 3.8%, indicating potential support for Bitcoin's price. Major liquidity shifts typically impact Bitcoin's value within about 60 days, suggesting that we might see a bottoming out by April. Moreover, with Bitcoin's current MVRV Z-score remaining neutral, there is room for further price appreciation before reaching historical valuation extremes. Investors should keep an eye on central bank policies and liquidity injections, as these factors will continue to shape Bitcoin's trajectory.