There is probably no investor in the world that is not aware of the high octane nature of Bitcoin. Incredible drawdowns, followed, so far by incredible run ups, sometimes in the triple digits. It is this characteristic that makes its defense as a storehold of value, a tough crusade. Since Trump inauguration till yesterday, Bitcoin has experienced a 25%ish drawdown. Why? It’s probably due to many factors, but the correlation between global liquidity (using M2 as proxy) and Bitcoin is notoriously high, as you can see in the chart below. Coincidentally, the correlation between the S&P500 and global liquidity is also high, and perhaps that’s why the index has been trapped on a trading range for 3 months and falling rapidly over the last few days. Is liquidity drying out? Conceivably, the lagged effect of rising interest rates may be happening now, or perhaps the perception that no more fiscal stimulus or government spending will take place is making liquidity disappear. Levered players may be deleveraging. Or perhaps bitcoin is falling in anticipation of a draught, and what was an effect, has morphed into a cause. Bitcoin may not be the epitome of hard money, but it very well may be a leading indicator on global liquidity. If that is the case, and paraphrasing Mr Buffett, these low tides will show who is swimming naked.
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Chart Source: Lyn Alden
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