Declining Global Liquidity Signals Potential for Further Bitcoin Losses

Bitcoin's recent 15% correction in the third week of December marked its largest weekly drop since August 2024. Experts are attributing this sharp decline to global macroeconomic factors

Bitcoin's recent sharp decline, marking its largest weekly drop since August 2024, has sparked attention to the role of global macroeconomic factors in influencing the cryptocurrency's price movements. As the world grapples with inflation and central banks navigate interest rate policies, the implications for Bitcoin's price trajectory are being closely examined.

According to The Kobeissi Letter, Bitcoin's price typically exhibits a 10-week lagged correlation with the Global Money Supply (Global M2). This relationship has been observed over an extended period, with periods of increasing money supply coinciding with rising Bitcoin prices.

However, recent months have seen a different scenario unfold. As the U.S. Federal Reserve began raising interest rates to curb inflation, the Global M2 has experienced a contraction. This liquidity squeeze, evident in the decreasing money supply, has coincided with a downturn in Bitcoin's price.

As of December, the Global M2 stands at $104.4 trillion, marking its lowest level since August 2024. This signifies a substantial decline from the record high of $108.5 trillion in October 2024, which coincided with Bitcoin's all-time high of $108,000.

This dynamic has led some experts to anticipate a potential further decrease in Bitcoin's price, with some predicting a possible drop of $20,000 in the coming weeks if current trends continue.

Consorti's Predictions Materialize with Recent Correction

A month prior to this recent development, Joe Consorti, Head of Growth at Theya, a Bitcoin custody firm, had flagged the potential for a 20%–25% Bitcoin correction based on similar indicators. Consorti's predictions appear to be coming to fruition with the recent downturn in Bitcoin's price.

However, Consorti's colleague, André Dragosch, Head of Research at Bitwise, maintains a pessimistic outlook for Bitcoin in the short term. Dragosch anticipates that Bitcoin will continue to face downward pressure due to the ongoing liquidity tightening in the United States and globally.

Despite this bearish outlook, Dragosch identifies an internal factor that could play a role in mitigating the negative effects of tightening liquidity: the growing illiquid supply of Bitcoin.

Illiquid Supply May Offer Long-Term Support for Bitcoin's Price

As Bitcoin continues to navigate the challenges of decreasing global liquidity, its internal dynamics may offer some support for its price. An increasing proportion of Bitcoin is being absorbed into long-term storage or held by investors who are unwilling to sell their holdings. This shift is reducing the available supply of Bitcoin in the market.

With less Bitcoin available for purchase, its scarcity could bolster its price. This dynamic may counterbalance the effects of declining global liquidity and offer some support for the cryptocurrency's value.

Dragosch highlights that this growing supply deficit could eventually outpace the bearish macroeconomic factors affecting Bitcoin. While short-term volatility is expected, particularly in early 2025, these bullish on-chain factors could present attractive buying opportunities for investors willing to weather the storm.

At the time of writing, Bitcoin is trading around $94,000, down nearly 6% over the weekend. The ongoing decline in global money supply and tightening liquidity in the U.S. suggest that Bitcoin may continue to face downward pressure in the short term. However, the increasing illiquid supply of Bitcoin provides some long-term optimism for the cryptocurrency, as its scarcity could bolster its value once macroeconomic conditions stabilize.

As 2025 approaches, Bitcoin's ability to navigate these challenges will be closely watched. If internal factors like reduced supply continue to drive demand, Bitcoin could eventually regain its upward momentum. In the meantime, traders and investors will likely remain cautious as they monitor global liquidity and market trends for further signals of Bitcoin's direction.