June 2024

Simplicity. There’s nothing quite like tackling a task that initially seems complex and time-consuming, only to find a previously unimaginable, simple, and brilliant solution. I can’t count the number of times I’ve resolved ‘unfixable’ tech problems by just turning the device off and on again. After all, it’s human nature to optimize our processes; we’ve evolved to despise inefficiency.

Yet, in investing, there’s this ever-growing fallacy of necessary intricacy. A belief that outperformance demands uncovering obscure insights, monitoring countless metrics, and a lifetime of commitment to establish a suitably unique market edge.

“Fallacy” - noun | UK /ˈfæl.ə.si/ US /ˈfæl.ə.si/ - An idea that a lot of people think is true but is in fact false.

The price of an asset is derived from a fundamental principle you’d have covered in your inaugural ‘Economics 101’ class: Supply & Demand. This concept may seem so obvious that it hardly warrants consideration.

So here I’m going to outline the data that not only proves this hypothesis but also how relying on this basic idea has historically outperformed bitcoin, as well as the fact that we’ve recently, once again, received the signal for risk-on market conditions. We should be as bullish as ever on the probability of future price appreciation.

Many may only consider the Supply & Demand of Bitcoin when calculating the impact on price. This is obviously a very important factor! However, many may be overlooking the Supply & Demand of what we measure BTC against, predominantly USD and other fiat currencies. If the Supply & Demand economics of bitcoin remained absolutely constant, yet we’re faced with an increasing Supply or decreasing Demand of our chosen currency, we can again anticipate a positive reaction in the underlying bitcoin price as a positive consequence of this.

In the above Global M2 vs. BTC YoY chart, we can visualize the increasing or decreasing supply of Global circulating cash or cash equivalents. Immediately, you can observe the parallels between the fluctuations in this value and the impact on the BTC rate of change. However, this can’t be classified as simple correlation; this is in fact causation, and we can prove it!

The above chart has now applied a simple 200-period moving average (red line) to the Global M2 data (blue line). We can clearly see the cyclical trends in liquidity, typically occurring in a similar way to bitcoin’s bull/bear cycles with a comparable two-year boom and two-year bust pattern. We can then find the dates when the individual data points cross over/under its average, indicating a significant increase/decrease in fiat supply compared to the historical average.

The signals can be a little messy. As you can see when overlaying each of these crosses on the BTCUSD chart, there are plenty of instances when we see an immediate cross under, then over, etc. To clarify the signals a little better, I’ve excluded bullish (green) signals that are immediately preceding bearish (red) signals and vice versa.

Also, just as a point of reference, if you were to have bought bitcoin at the initial bullish signal on this chart (23rd April 2015) at a price of $233.65 and held until today with price at $68,810.26 - you’d have netted 29,350.14% returns.

Over the last ten years, acting purely on these 5 Global fiat supply increasing bullish signals to enter trades and fiat supply decreasing signals to exit your position, you’d have netted 31,105.79% gains when accounting for capital compounding.

As you can probably see from the chart, it’s not as if the sell signals were often at the most opportune moments, yet it still noticeably outperformed a buy & hold approach on one of the best-performing assets globally.

You may have also spotted at the far right-hand side of the images the beautifully green bullish signal that has once again formed, indicating governments and central banks worldwide are turning the money printers on once again…

Given the historical accuracy of these signals, Bitcoin's current bullish fundamentals, and our current post-halving position in this bull cycle, I once again wonder why anyone would make this any more complicated than it needs to be.

This simple observation outlines the immense impact Global Liquidity trends have on markets, without even taking into consideration the shift in appetite for risk-on assets, or even the decreasing supply of liquid Bitcoin paired with its own growing demand. At some point, a tipping point will be reached, and the maths and economics behind Bitcoin’s Supply & Demand derived fiat valuation will increase drastically. Given recent developments, that tipping point is probably closer than ever.

Opt for simplicity, follow liquidity, accumulate bitcoin.