range of risks
For his part, Ilan Solot, a partner at cryptocurrency investment firm Tagus Capital, said that the relationship between M2 and Bitcoin can be explained by at least two factors; The first concerns where Bitcoin and cryptocurrencies lie on the risk spectrum, as greater liquidity in the financial system generally benefits riskier assets.
He added: “The mechanical growth of the money supply means the rise of lifeboats, and Bitcoin is one of those boats.”
But the second is related to inflation expectations and monetary policy. When the money supply increased last year, buyers expected prices to soon follow, prompting some cryptocurrency advocates to buy cryptocurrencies with the idea of inflation protection.
See also: Bitcoin leads to loss of cryptocurrencies amid panic hitting global markets
According to Solot, some of these investors are betting that the Fed will not raise interest rates enough to fight inflation and will prioritize other factors such as economic growth. That story hasn’t panned out, as Federal Reserve Chairman Jerome Powell has announced three consecutive 75-basis-point rate hikes this year and hinted there are more to come.
The shrinking money supply has made an asset like bitcoin less attractive to investors — even those who see it as a hedge against inflation. “You don’t want to buy insurance when the house is already on fire,” says Solot.
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