Bitcoin (BTC) Price Is Directly Correlated to Global Liquidity Growth, Says Raoul Pal

Bitcoin's price closely tracks global liquidity growth, with liquidity explaining up to 90% of its price movements, according to Raoul Pal.

Bitcoin's price is notoriously sensitive to global liquidity, some analysts say it nearly perfectly tracks it with a lag of about three months. This relationship is fueling the current bullish narrative as BTC price soars back above $100,000. But how long can this trend last?

According to Raoul Pal, the founder of Global Macro Investor, global liquidity is closely tied to the increase in debt levels in many countries. In a recent speech, later recapped by Paul Guerra, Pal highlighted this connection, asserting that despite looming concerns—recession risks, geopolitical tensions, and other global stressors—liquidity is the dominant force behind asset price action.

As he highlighted, we’re now in the 11th year of the bull market, an anomaly in itself, with risky assets like the Nasdaq and Bitcoin continuing to rise despite the narrative of a pending market crash. According to Pal, this resilience can be attributed to an "unyielding tide of global liquidity."

According to his calculations, global M2 liquidity, the broadest measure of the money supply, explains up to 90% of Bitcoin's price movements and as much as 97% of the Nasdaq's performance when considering a 12-week lag.

A chart comparing global M2 (with a 12-week lead) and Bitcoin's price shows an almost uncanny alignment, especially over the past two years. The correlation is particularly striking over the shorter time frame, with periods of divergence often followed by convergence later in the cycle.

Pal also frames the issue in personal finance terms. He says there's an 11% "hidden tax" on all of us, composed of 8% currency debasement and 3% global inflation. According to Pal, this tax ultimately flows to governments and central banks, impacting everyone through changes in the purchasing power of our money.

In the long term, this new tax is part of a broader trend of global liquidity expansion, which began in the wake of the 2008 financial crisis with a focus on U.S. dollar liquidity. Over the past 15 years, we've seen a nearly linear increase in global M2, with a slight uptick in 2018 due to the People's Bank of China's (PBoC) actions.

This offers a high-level view of global liquidity and suggests its long-term expansion is structural. However, this growth isn't linear. Over shorter time frames, it fluctuates based on specific drivers.

As reported by Capital Economics, in the short term, three main factors influence global liquidity: the U.S. Federal Reserve, the PBoC, and banks lending through collateral markets.

On the bright side, the weak global economy and a softening dollar usually bode well for liquidity. But rising bond volatility, a key indicator of collateral scarcity and tightening credit conditions, is choking lending and ultimately undermines liquidity.

Together with the strong demand for U.S. Treasury bonds, this dynamic is crucial for understanding the ebb and flow of global liquidity.

According to Michael Howell, author of "Capital Wars," these two forces are now converging, setting the stage for a potential turning point in the cycle.

As Howell explains, global liquidity moves in roughly five-year cycles, with each cycle marked by a specific driver and a unique time frame. The current cycle, which began with the PBoC injecting liquidity into the system in response to the COVID-19 crisis, is nearing its peak.

Howell projects this cycle to mature by mid-2026, reaching an index level of around 70 (below the post-COVID index of 90). This would mark a turning point, with a subsequent downturn being a likely outcome.

This pessimistic outlook is partly due to the rapid pace of global liquidity expansion, which is occurring at an unprecedented rate. In the past, such rapid increases in liquidity were usually followed by periods of contraction, as seen in the 1970s and 1980s.

However, the current cycle is unfolding against the backdrop of a persistently weak global economy, which is likely to prompt further easing by central banks.

The Fed, in particular, faces a difficult choice: continue fighting inflation or pivot to support an increasingly fragile financial system. At its May 7 meeting, rates were held steady, but the pressure on Chair Jerome Powell is mounting, especially from US President Donald Trump, who urged the Fed to cut rates to zero to help the economy.

At the same time, economic uncertainty is driving up U.S. Treasury yields and fueling bond market volatility, both indicators of collateral scarcity and tightening credit conditions. Over time, these pressures are likely to become headwinds for liquidity expansion.

Moreover, a looming recession is expected to weaken investor risk appetite, further draining liquidity from the system. This pessimistic outlook stands in stark contrast to the bullish view of market analyst Tom DeMark, who predicts