How the money supply affects the price of Bitcoin

How realistic is it that Bitcoin will rise to a million dollars? Probably much more realistic than most people assume. One underestimated factor: the development of the money supply.

Many investors view the financial market as a zero-sum game. If one stock or cryptocurrency rises, another must fall in return or capital must be withdrawn from monetary assets or the real economy. Assuming a constant money supply, this approach is not wrong in principle. However, many investors ignore the fact that the money supply in the system tends to increase rather than remain constant or decrease.

The following examples and calculations show the impact of money supply expansion on asset prices and how this could affect the Bitcoin price.

Disclaimer: This article represents the opinion of the author only and does not constitute investment advice or a recommendation to buy or sell.

Money supply: factor of 100 in 60 years

To understand the magnitude, it helps to look at the evolution of money supply aggregates.

The money supply M3 in US dollars has increased by a factor of nearly 100 since 1960. A significant part of this increase occurred in the latter part of time. In the period from 2010 to 2020 alone, the money supply M3 doubled from about US$8 trillion to about US$16 trillion - with a strong upward trend. Just two years later, it will have reached US$21.5 trillion.

Despite the inflation-related temporary reduction in the money supply (thightening), it cannot be assumed that it will remain constant or fall. Given the debt problem, the opposite is more likely: After a short pause, the money supply is likely to rise exponentially rather than linearly, as the graph suggests.

Inflation helps Bitcoin and Co.

Real economic inflation may be low - barring phases such as the current one - but the historical effect of the expansion of the money supply was mainly visible in the form of asset inflation. The market capitalization of stocks and other asset classes shows how much.

In the past 13 years, for example, the market capitalization of the 500 most valuable US stocks has quadrupled from about US$11 trillion to about US$40 trillion since 2010. As we look at the market capitalization of the 100 most valuable assets - 89 stocks, 5 ETFs or indices, 4 precious metals, 2 cryptocurrencies - we can see how quickly market capitalization has increased in recent years.

The following example illustrates growth: The most valuable publicly traded company 20 years ago was worth about $270 billion (Microsoft). In contrast, the most valuable publicly traded company today is worth 10 times as much, $2.75 trillion (Apple).

While you could say that it is mainly the big tech companies that have won a disproportionate piece of the pie, the market capitalization of smaller companies and companies from other sectors has also increased significantly in recent years.

Beware of anchor points

The implication is that we should resist the temptation to focus on current market capitalization if we have a long-term investment horizon. A classic example is the market capitalization of gold, which is about $12 trillion. Bitcoin advocates in particular tend to compare Bitcoin's market capitalization, about $500 billion, to the same capitalization of gold.

Of course, you can do the math and say that Bitcoin will rise to over $500,000 if Bitcoin matches the market capitalization of gold (factor of 22). However, this assumption is greatly simplified because it suggests that the market capitalization of gold will not change in the coming years. The gold price has increased approximately eightfold since 2000. Therefore, it cannot be assumed that gold will still have a market capitalization of about $12 trillion in, say, 10 years.

The global equity sector, which currently accounts for about 108 trillion US dollars, is also likely to achieve significantly higher capitalization in the coming years, in line with rising GDP and money supply. Ten years ago this was only about 65 trillion US dollars.

Debt and money supply

At the same time, our debt growth is strongly linked to money supply growth. Whatever graph you look at in this context, there is only one direction: steeply upward. Given the massive refinancing needs of states, corporations and private households, an increase in the money supply in the current system is almost certain in the coming years.

Our economic system can certainly handle the current pause in liquidity expansion for a few months, but not a few years. It is much more likely that the pendulum will swing back more strongly and we will see a doubling, if not tripling, of the money supply before the end of this decade.

Bitcoin to one million dollars?

Based on past experience, we can expect Bitcoin to react strongly to an expansion of the money supply. Thus, the maximum possible market capitalization of Bitcoin is not limited and is only derived from the money supply.

Therefore, the price of Bitcoin also rise to $500,000 or even a million dollars without having to overtake its physical counterpart gold in terms of market capitalization. The prediction by star investor Cathie Wood of ARK Innovation that Bitcoin will break the $1 million mark by 2030 is therefore not such a bad bet.

Of course, without widespread adoption, Bitcoin will not succeed, but again, BTC is definitely on the right track. Despite the silence in the crypto market, all the technical indicators - hashrate, number of wallets, nodes, etc. - speak a clear language, as long as you don't get constantly riled up by weekly or monthly statistics.

Disclaimer: This article represents the opinion of the author only and does not constitute investment advice or a recommendation to buy or sell.