The price of Bitcoin is surging and there are many catalysts behind it, such as institutional demand and the appetite for risk-on assets.
But, there is one major factor that makes Bitcoin particularly compelling as a store of value and that is the M1 Money Supply.
Central bank liquidity injections boost inflation, make Bitcoin appealing
Throughout 2020, central banks have injected significant liquidity into the market.
Due to the pandemic, central banks were pressured to maintain relaxed financial conditions. They achieved this by printing more money and encouraging more stimulus to boost the economy.
A direct consequence of that has been the devaluation of reserve currencies. Most notably, the U.S. dollar has fallen substantially since mid-2020.
Bitcoin and gold are both considered alternative stores of value and safe-haven assets. As such, they are valued against the U.S. dollar and when the dollar declines, both assets benefit from it.
The dollar has struggled to recover throughout the past seven months. It has seen one of the worst slumps in history, declining against both alternative assets and other reserve currencies.
A concerning trend is that the M1 Money Supply has been expanding rapidly as the dollar continues to drop.
For institutions and accredited investors, this specific trend has made Bitcoin more attractive as a potential hedge against inflation.
"There's nothing wrong. Everything's fine." pic.twitter.com/ATPN7G0hjg
— Finance Optimum (@FinanceOptimum) December 23, 2020
Since the March crash in 2020, Bitcoin has rallied from $3,600 to $29,200, by nearly eight-fold. BTC has outperformed all currencies and safe-haven assets and has only lagged behind Tesla among the major U.S. stocks.
Institutions are consistently accumulating
The momentum of Bitcoin is causing institutions to aggressively accumulate Bitcoin as a result.
The go-to metric to use to evaluate the institutional sentiment around Bitcoin is Grayscale’s assets under management (AUM).
The AUM of Grayscale is important because the Grayscale Bitcoin Trust is the go-to institutional vehicle to gain exposure to BTC in the U.S.
On January 1, Grayscale disclosed that its AUM surpassed $20 billion. This means that institutions are holding upwards of $20 billion worth of capital with Grayscale and have invested in cryptocurrencies.
12/31/20 UPDATE: Net Assets Under Management, Holdings per Share, and Market Price per Share for our Investment Products.
— Grayscale (@Grayscale) December 31, 2020
Considering various factors and the rapidly growing M1 Money Supply, analysts anticipate Bitcoin to sustain its uptrend throughout 2021.
A pseudonymous trader said:
“This is what the start of a monetary singularity looks like. Scarcity v abundance. Bitcoin has no other choice but to GO UP.”
In the near term, the key for Bitcoin to avoid a correction and see an upward trend is for Grayscale inflows to refrain from slowing down.
If inflows into Grayscale’s products decrease or stagnate, this would mean that the institutional demand for BTC is declining. Hence, it is critical for Bitcoin’s rally that institutions continue to accumulate BTC in the foreseeable future.
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