Global Money Supply Dynamics and the Bitcoin Value Proposition

Posted on December 22, 2023

The world of asset management demands an eye on various economic indicators, one of which is the M2 money supply—a measure encompassing cash, checking deposits, and near money. It's an indicator, often overshadowed by more immediate financial metrics, yet it provides deep insights into the liquidity and health of economies on a global scale. The following diagram uses data from Bloomberg and shows the M2 money supply of the G20 countries in relation to each other.

As can be seen, Bitcoin takes only a meager 0.76% of this pie (Data as of November 2023). What would be interesting to see is the historical data to see how the value of money in countries like Argentina and Turkey recently evaporated. Analyzing the money supply and their volatility of large counties and putting it in relation to Bitcoin illustrates a tale of the fragility of fiat money systems in the face of economic mismanagement and external shocks.

In this broader context, Bitcoin emerges as an asset that defies traditional monetary expansion. With a supply capped at 21 million coins, it stands as a bastion against the inflation that often plagues fiat currencies. This fundamental characteristic of Bitcoin provides a compelling alternative to traditional monetary systems, which are susceptible to the whims of policy and the challenges of maintaining value over time. That's what is currently priced in and what will be continued to drive prices higher. It's an alternative to traditional bank-backed currencies.

While it currently represents only a small fraction of the world's money supply, the forecast for Bitcoin's growth is significant. Should Bitcoin ascend to represent 5% of the money supply (say within the next five to ten years) its implications are profound: Such an ascent would translate into a significant market capitalization increase, potentially driving the price of Bitcoin to an estimated $308.9k per BTC. This prediction, in my view is not just a speculative leap but a calculated inference based on Bitcoin's historical growth patterns, its deflationary nature, and its increasing acceptance as both a store of value and a medium of exchange. It's a strong case and 5% of global money (I have excluded all other 160 currencies out there) is not unreasonable an estimate.

The integration of Bitcoin into a diversified investment portfolio then not only represents a strategic move to hedge against currency devaluation and inflation. It's a perspective that aligns with a forward-thinking approach to asset allocation, one that considers not only the present-day valuations but also the long-term trends shaping the future of money.

In light of these considerations, the importance of M2 as a global economic indicator cannot be overstated. It is a crucial piece of the larger financial puzzle, providing context for the evolving narrative of digital currencies like Bitcoin. As the global economy continues to navigate through uncertain waters—and it's inevitable—understanding and leveraging these indicators will be key to making informed investment decisions.

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