Global liquidity and Bitcoin

Chart of the Bitcoin price against the 13-week change in global liquidity (Federal Reserve, ECB and Bank of Japan), shifted 13 weeks forward, with weekly FRED data since 2011.

What is global liquidity?

It is the money the major central banks inject into the financial system, measured in dollars. Here, Federal Reserve net liquidity (its balance sheet minus the money the Treasury keeps parked in its account and what banks leave in reverse repos) is added to the balance sheets of the European Central Bank and the Bank of Japan. It rises when central banks buy assets or the dollar weakens, and falls when stimulus is withdrawn.

Does liquidity lead the Bitcoin price?

Partly. Since 2015, the 13-week change in global liquidity and Bitcoin's return over the following 13 weeks have a correlation of about +0.44, almost double that of Fed liquidity alone (+0.23). It is a moderate relationship and does not always hold: in 2012-2013 and 2018-2019 it barely worked. That is why the chart shifts liquidity 13 weeks forward: to see whether the price's turns come after its own.

How does the index use it?

Global liquidity is one of the metrics in the liquidity category of the Is BTC Cheap? index, along with M2 money supply, dollar strength and stablecoin supply. It weighs little on short timeframes and more on the monthly one, where it helps anticipate the following year.