Bitcoin’s Shifting Motif
April 2025
Bitcoin as digital money and as digital gold are two motifs that have been widely circulated since its inception. The description of Bitcoin as digital money is meant to suggest that BTC functions as store of value, a unit of account, and a medium of exchange. Meanwhile, its role as digital gold emphasizes the store-of-value characteristic, especially over longer horizons beset by political and financial upheavals. But are wallet holders really using BTC for payments, especially given its volatility and long-term appreciation potential? More recently in the last 5 years, BTC has behaved more like a long-duration, high risk tech stock rather than gold itself.
“Money, it’s a gas” – Pink Floyd, 1973
The use of BTC as money was perhaps more common back in the days of yore when most of the early adopters couldn’t conceive of how far the future value would reach. Today’s value of the bitcoin pizzas would be over $900 million so most would rather hodl than transact in BTC, although many nominal transactions still occur in satoshis for goods and services rendered.
During these early years after the genesis block, assessing the network effort to value the Bitcoin chain was reasonable. In one of our earlier pieces, Valuing a Cryptocurrency Network, we detailed the usefulness of applying Metcalfe’s Law. More specifically, we examined the relationship between BTC’s market capitalization and the number of daily active addresses. We found that market cap grew approximately in line with the square of the number of addresses but quite importantly, we noted that this relationship diminished significantly after 2020 and broke down after 2021.
Not All That Shines is Gold
The trope that BTC is digital gold was never to be taken literally but rather points to the expectation that BTC offers a strong alternative form of money to fiat currencies, including the world’s reserve currency, the US Dollar. In our previous blog, Bitcoin as Digital Gold, we emphasized Bitcoin’s importance as a store of value. It is an “asset that can be saved today in order to be exchanged for goods and services in the near or distant future holding more or less the same value it has today.” As a matter of fact, an examination of the quarterly returns of gold and BTC over the five-plus years from 2020 through the first quarter of 2025 shows that the relationship is all over the map. The quarterly correlation is near zero.
Source: Firinne Capital, CoinGecko, Yahoo Finance
BTC actually holds a more interesting relationship with the Nasdaq Composite. Quarters of positive and negative returns are more closely aligned for these two assets. That correlation stands around 0.54 over the last five-plus years and if the Nasdaq returns were to be used as a single variable in a regression, it would explain about 29% of the variation in the BTC returns.
Source: Firinne Capital, CoinGecko, Yahoo Finance
However, correlation is not necessarily causation so what may be the underlying cause here?
Liquidity Everywhere
Liquidity is a term used in finance that can take on different meanings depending on the context. For the sake of discussion, we will describe it as “the availability of funds for purchases of goods or assets”, as borrowed from this 2014 paper. The term liquidity conjures up analogies to water, which is quite apropos because like water, liquidity that is unobstructed reaches all corners of the global financial market.
One measure of liquidity is the amount of broad money supply or M2. As defined by the Federal Reserve, M2 includes the cash in circulation, deposits held by banks at the central bank, and other cash equivalents. A central bank, through its monetary policies, can control the amount of liquidity it provides to or drains from the economy.
For context, US M2 is around $22 trillion while the global M2 is around $93 trillion if measured across the four major economies of the US, China, EU, and Japan. Over the last five years, liquidity increased dramatically at the onset of Covid in early 2020 as federal governments and central banks provided cash to support the slowing economies. Starting in the first quarter of 2022, liquidity dropped dramatically as central banks tightened in response to the inflation shock brought on by the global supply chain disruption at the onset of Russia’s invasion of Ukraine. Conditions eased and liquidity came back after nearly a year when inflation was brought under control.
Global M2 vs BTC Price, 2020 - 1Q 2025. Source: bitcoinisdata.com
Charts, similar to the one above, have been circulating in the more recent few years to explain the movement in digital asset prices, notably BTC. The close co-movement of these two time-series easily leads one to jump to the conclusion that liquidity drives BTC pricing.
A more rigorous statistical analysis, however, does not readily offer the same conclusion. Many papers and websites regress prices on the levels of global M2 and achieve high R-squares north of 90%. However, the problem with regressing on levels is that the time series are both growing continuously and are therefore nonstationary, leading to spurious correlations. Another problem is that when combining M2 figures of international central banks’ currencies, these are converted back to the US dollar using the exchange rate. When regressing against the price of the BTC, quoted in US Dollar, one needs to properly isolate the currency effect (i.e., the effect of the USD appreciating or depreciating against all other financial assets) from the returns of BTC itself. With the US M2 making up less than 25% of the global figure, the exchange rate impact is not inconsequential.
One can address these shortcomings by comparing quarterly changes in liquidity to BTC returns. Additionally, using just the US M2 or an alternative USD monetary liquidity measure (as suggested in this research preprint and an earlier post by Arthur Hayes) may serve as a reasonable proxy for global liquidity given that in recent years, central banks have moved in tandem in response to the 2020 Covid and 2022 inflation shocks.
We ran this analysis and found that while changes in the USD monetary liquidity are cointegrated with BTC price returns (i.e., they trend in the same direction), correlations are poor and therefore, shifts in monetary liquidity do a poor job of explaining BTC returns. The evidence is episodic, anecdotal, but statistically speaking, weak. This in of itself is not disappointing. Liquidity, as a systematic trading indicator, may not offer much help. However, it may still play an important role for scenario analysis, a tool that is useful for long-term investors.
The evolution of bitcoin pricing being more aligned with equities, quite likely driven by monetary cycles, is further strengthened by the research conducted by the IMF back in August 2023 titled “The Crypto Cycle and US Monetary Policy”. The researchers similarly concluded that “[a] single crypto factor can explain 80% of the variation in crypto prices and has become more correlated with the global financial cycle since 2020, particularly with technology and small-cap stocks.” The researchers similarly focused on the US financial markets but instead of using measures of monetary liquidity, they used interest rates to track changes in monetary policy. By modeling different behaviours of crypto versus institutional investors and noting the increased use of leverage to trade cryptoassets, they concluded that “[as] institutional investors make up an increasing share of the crypto market, the risk-taking profile of the marginal investor in crypto converges on that in equities. A rise in the risk-free rate reduces returns, and increasingly so if institutional investors hold a larger share of crypto and more levered agents are more sensitive to the economic cycle”.
Bitcoin retains its utility as a stateless, permissionless, censorship-resistant form of digital money. Its growth in valuation initially seemed to be attributable to a growing network effect, but more recently, it has been trading as a long-duration risk asset like technology stocks, subjected to the macroeconomic winds. Today, bitcoin is held in many forms from one’s own digital wallet on-chain, a ledger on a centralized exchange, to exchange traded products (ETPs), so the agents who own and trade BTC are quite varied. As social adoption grows, the drivers of Bitcoin valuation will continue to shift. Dare we even say it – that the very belief that bitcoin will grow in adoption and value, is in of itself attracting more hodlers and thereby, turning into a meme?