Written by: Blockchain Knight

The response of Bitcoin to global liquidity currently diverges from the last cycle. Even as the broad money supply (M2) continues to expand, the financial tightening speed brought about by the strengthening dollar far exceeds the liquidity that boosts prices, indicating that the M2-driven analysis framework for Bitcoin seems to be failing.

In the past, the lagging global M2 liquidity was a core bullish indicator for Bitcoin, where monetary expansion would ultimately flow into risk assets. This rule has proven to be reliable, with many institutions treating it as a "leading indicator for price increases."

However, despite U.S. M2 climbing month by month, reaching $22.667 trillion in February, with a continuous growth rate, Bitcoin has been suppressed around $68,000, showing a complete divergence from the liquidity expansion.

The core reason is that M2 is a monthly stock indicator, and its expansion takes months to transmit through credit and capital flows to risk assets, making it a slow variable.

In contrast, the strengthening dollar index is a fast variable, tightening financial conditions within a few days after its rise. The Federal Reserve, Bank for International Settlements, and IMF have all confirmed that dollar appreciation rapidly suppresses global capital inflow and risk appetite.

The geopolitical conflicts and soaring oil prices in March have exacerbated this divergence, with the dollar index rising 2.35% in a single month, rebounding 5% from the January low, achieving the best quarterly performance since the end of 2024. In the same period, M2 only increased by 1.25%, with tightening speed four times that of expansion.

Oil prices have also been significantly raised, directly pushing up inflation expectations. The Fed's interest rate cut expectations dropped sharply from 50 basis points to 25 basis points, further boosting the dollar, while M2 data is published with a one-month lag and cannot offset the short-term tightening.

Additionally, the global M2 indicator needs to be converted into dollars, and exchange rate fluctuations can directly distort its accuracy. The strengthening dollar also weakens the liquidity benefits from the indicator perspective.

This means that M2 can only serve as a long-term background indicator, with the short-term market being dominated by the dollar.

In a bullish scenario, if geopolitical tensions ease and oil prices fall, leading to a decline in the dollar's strength, the liquidity benefits from M2 will become effective again, narrowing the divergence between Bitcoin and M2.

In a bearish scenario, if oil prices and risk aversion remain high while the dollar maintains its strength, the divergence between the two will persist long-term.

Currently, Bitcoin is no longer a pure liquidity leading indicator but rather a reaction to macro-variable games.

The key moving forward is whether the dollar's upward momentum will suddenly stop; otherwise, traditional liquidity models will continue to fail. However, in the long run, M2 may still influence Bitcoin's movements, though the short-term correlation is decreasing.

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