External factors affecting Bitcoin

Author: Matt Crosby, Head of Research and Analysis, Bitcoin Magazine Pro; Translated by: Shaw & Jinse Finance

On-chain metrics and technical analysis alone cannot fully understand Bitcoin's price movements. External macroeconomic factors have a significant impact on Bitcoin's cyclical behavior. To understand Bitcoin, these external factors need to be combined with other key indicators to gain a comprehensive market perspective.

Monetary Policy

Bitcoin and the S&P 500 index exhibit a very strong positive correlation, meaning they typically move in tandem. When the stock market rises, Bitcoin tends to rise as well; when the stock market falls, Bitcoin typically falls as well. This correlation indicates that understanding the factors influencing the stock market is crucial for Bitcoin analysis. The Federal Reserve's balance sheet provides key information about monetary conditions. During periods of quantitative tightening, balance sheets shrink, and liquidity constraints suppress speculative desires, typically limiting Bitcoin's upside potential. Conversely, during periods of quantitative easing, balance sheets expand rapidly, and ample liquidity encourages risk-taking, which usually aligns with Bitcoin's bullish performance. Figure 1: Relationship between the Federal Reserve's Balance Sheet and Bitcoin Price. Global M2 Money Supply Global broad money supply (M2) represents the total amount of money circulating globally, including cash equivalents and short-term deposits. While many analysts focus on the absolute value of the M2 supply, **examining the year-on-year growth rate of M2 provides a deeper understanding of Bitcoin price dynamics.** Year-on-year growth reflects the acceleration or deceleration of monetary expansion, rather than the absolute value of a natural upward trend over decades. Figure 2: Analyzing global M2 money supply using year-on-year growth rate to illustrate its correlation with BTC. The year-on-year growth rate of global M2 money supply almost perfectly coincides with Bitcoin's expansion and severe bear market periods. This indicator is crucial because Bitcoin is a global asset, not limited to US investors. Global monetary policy, not just the Federal Reserve's policy, is the main driver of Bitcoin's macroeconomic landscape. Institutional Fund Flows The introduction of Bitcoin Exchange-Traded Funds (ETFs) in recent years has fundamentally changed the dynamics of Bitcoin fund flows, making it easy for institutional investors and high-net-worth individuals to accumulate Bitcoin. **ETF cumulative fund flows can reflect institutional holdings in real time.** Large inflows into ETFs typically coincide with periods of rising Bitcoin prices, as institutions invest significant amounts. Conversely, large outflows from ETFs usually occur before or simultaneously with falling Bitcoin prices, as institutions reduce their holdings. Figure 3: Growth of Bitcoin ETFs. The Relative Strength Index (DXY) measures the relative purchasing power of the US dollar against a basket of other fiat currencies. Examining the year-over-year change in DXY provides deeper insights than the absolute value. Bitcoin is negatively correlated with DXY. A weakening DXY year-over-year suggests a favorable trend for Bitcoin. A weaker dollar makes hard assets like Bitcoin more attractive as dollar holders seek to preserve value. However, **when the DXY (US Dollar Index) strengthens year-over-year, it indicates that Bitcoin will face headwinds.** Figure 4: The inverse relationship between the US Dollar Index and Bitcoin prices.

Treasury Companies Accumulate

Digital asset treasury reserves have rapidly incorporated Bitcoin into their corporate strategies, with the top 20 Bitcoin treasury companies currently holding approximately 1 million Bitcoins. More than 100 publicly listed treasury companies globally are actively adding Bitcoin to their balance sheets. This represents a significant reduction in the supply of Bitcoin, as held Bitcoin typically remains illiquid for extended periods rather than being frequently traded.

Figure 5: Bitcoin Treasury Tracker shows the BTC accumulation of the top 10 listed treasury companies. From a purely supply and demand economics perspective, these institutions removing 1 million Bitcoins from the liquid supply is equivalent to building structural support. Any asset that can attract hundreds of billions of dollars in inflows represents genuine confidence and optimistic market sentiment. Conclusion A true understanding of Bitcoin requires combining on-chain metrics, technical analysis, and macroeconomic factors. The maturation of Bitcoin necessitates a complex, multi-faceted analysis.