source: Bitcoin Magazine
You can see how sensitive the price of bitcoin is to global liquidity. Of course, over the decade shown on the chart, bitcoin rose by 498x while global liquidity rose “only” 60%, so it is not as if there is a 1:1 relationship here. But, in general, the price of bitcoin will perform well in a pro-liquidity environment and poorly in a negative-liquidity environment.
As such, since most acute market crises are negative-liquidity events, so long as we live in a fiat-denominated world we can expect bitcoin to perform poorly in terms of price during those events. This does not mean whatsoever that bitcoin fails as a store of value.
Again, think about it: we need to store value in something other than fiat money because the supply of fiat money is always growing over time and thus losing its purchasing power over time. If the supply of fiat were constant, then it would store value just fine! And we wouldn’t need to search for other store-of-value assets.
But that is not the world we live in.
As you can see on the chart, there are relatively brief periods of time where global M2 does contract, such as 2022 when central banks were tightening monetary policy to combat inflation. This is why bitcoin performed poorly in 2022. But that is not to say it did not protect investors from inflation.
That inflation was caused, at least in part, by the dramatic increase in global M2 in 2020-2021, a period during which the bitcoin price increased by about 570%. I would say it protected investors from the oncoming inflation admirably, and didn’t just maintain purchasing power through the cycle, but increased it significantly.
I think a better way to think about bitcoin is that it will more directly protect you from monetary debasement (i.e. growth in global M2), rather than inflation. Of course, the two are intimately connected, but they are not quite the same thing. Bitcoin is immediately responsive to debasement, whereas inflation is a lagging side effect, only materializing some period of time after monetary debasement has taken place, and also subject to many other variables.
One of the core aspects of my bitcoin thesis is that every negative-liquidity market crisis must eventually turn into a pro-liquidity market crisis, because the only solution to the problem of not enough money is to print more money, or someone takes a haircut. And haircuts are not a politically palatable solution.
Take the US regional banking crisis in March 2023 set off by Silicon Valley Bank. Silicon Valley Bank did not have enough assets to cover their liabilities, and the bank went bust. Left alone, this is a negative liquidity crisis as money gets destroyed — depositors who thought they had money in their bank accounts suddenly don’t, and are poorer for it. But what happened is the Fed and the FDIC created new money to cover the shortfall and make depositors whole. After all, the only solution for not enough money is to print more money, or someone takes a haircut.
Bitcoin instantly responded to the crisis-averting injection of liquidity. After falling 17% in the week culminating in the bust of SVB, it rebounded by 42% in the following week after officials made it clear that would make depositors at the failed bank whole.
