Bitcoin Lags Stocks as Global Liquidity Remains Restrictive

Stocks are still holding near record highs, led largely by a small group of major technology companies, while Bitcoin (BTC) continues to lag. The bigger issue is liquidity: money supply is at record levels, but the type of liquidity that appears to matter most for Bitcoin remains much weaker.

This is where the market gets interesting. Global M2 money supply is at all-time highs, and the S&P 500 Index (SPX) has recently traded near all-time highs. If Bitcoin simply followed M2, you would expect it to be doing the same thing. It is not.

The difference appears to be global net liquidity, not just the total amount of money in the system. Think of it this way: M2 tells us how much money exists, while global net liquidity gives us a better sense of whether financial conditions are actually becoming more supportive or more restrictive.

That broader liquidity measure combines the balance sheets of major central banks, including the Federal Reserve, Bank of Japan, Bank of China, the United Kingdom, and the European Central Bank, then subtracts reverse repo balances and the Treasury General Account.

In 2022, global net liquidity was around $30 trillion. Today it is closer to $25 trillion. That is about $5 trillion less liquidity even though M2 itself is at record highs.

The United States dollar also matters because these central bank balance sheets have to be converted into the same currency. When the dollar rises, the dollar value of foreign liquidity tends to fall. When the dollar weakens, those foreign currencies become more valuable when converted into dollars, which can push global liquidity higher.

We have seen this kind of market before. In 2019, money supply was rising, and the S&P 500 Index was moving toward record highs, but Bitcoin stalled and eventually moved lower. Bitcoin did not really begin responding again until global net liquidity started rising much faster.

That relationship helps explain what is happening today.

The stock market has been able to stay strong partly because leadership has become very concentrated. Alphabet Inc. (GOOGL), Microsoft Corporation (MSFT), Amazon.com Inc. (AMZN), and Apple Inc. (AAPL) are among the large companies helping support the major indexes. Many other companies inside the S&P 500 Index are not doing nearly as well.

Artificial intelligence investment has helped keep that leadership concentrated in a relatively small number of very large companies. As long as those companies continue supporting the indexes, there is less visible pressure on the Federal Reserve to react aggressively to weakness in financial markets.

That can keep tighter liquidity conditions in place longer, and that matters for Bitcoin.

Bitcoin has still reached new all-time highs during this cycle, but that does not tell the entire story. Against the S&P 500 Index, Bitcoin has been losing relative value. Its valuation against stocks has returned to roughly the same area seen in 2021 and early 2022.

That is important because global net liquidity began falling in early 2022. Historically, when net liquidity stalls, Bitcoin can also stall and underperform stocks for a long period of time.

That does not mean Bitcoin cannot rise. It means Bitcoin can move higher in dollar terms and still underperform the stock market.

The same liquidity problem may also explain why we never saw the broad rotation into alternative cryptocurrencies that many investors expected. A lot of the altcoin cycle argument was built around the idea that record M2 would eventually push large amounts of money into crypto. That did not happen because global net liquidity remained relatively weak.

It may also help explain why this Bitcoin cycle has looked different. The market appears to have topped with more apathy than euphoria, and the decline has been slower and less severe than some previous cycles. Limited liquidity may have restrained the upside, but it may also be one reason the downside has developed differently.

So the number I am watching is not simply M2. I want to see global net liquidity begin expanding clearly from around $25 trillion. Until that happens, Bitcoin can still rally, but it may continue struggling to outperform stocks.

Rate expectations matter here as well. If interest rates remain high and the Federal Reserve continues reducing or limiting the size of its balance sheet, liquidity could remain restrictive.

For Bitcoin and the broader crypto market, patience matters. Record money supply alone is not enough. The stronger signal would be a real improvement in global net liquidity, and until that develops, I would remain disciplined rather than assuming that higher M2 automatically means Bitcoin and altcoins have to move higher.