Bitcoin and S&P 500 Show Concerning Trends When Adjusted for Money Supply

Adjusting asset prices for the growth in the U.S. M2 money supply shows troubling trends for both bitcoin and the S&P 500. Specifically, the S&P 500 index has only just reclaimed its dot-com era peak on a money-supply-adjusted basis, despite hovering near record nominal highs of 7,511 points.

Bitcoin has seen a significant decline, with its price dropping to $66,000 from its peak of $126,000 in October last year. This drop, often interpreted as part of another crypto bear market, alongside the nominal performance of the S&P 500, obscures the more nuanced picture revealed through adjustment for M2 growth.

The M2 money supply, as defined by the Federal Reserve, includes liquid assets like cash and deposits. Adjusting bitcoin’s price against M2 indicates that its previous outperformance against the increasing money supply may be fading. The BTC to M2 ratio forms what technical analysts identify as a head-and-shoulders pattern, typically viewed as a bearish sign.

Analysts suggest that this trend may indicate a broader trend of monetary exhaustion for bitcoin, which has historically been seen as a barometer for risk appetite. If bitcoin's price reveals diminishing returns against the M2 growth, it could serve as an early warning signal for the S&P 500, suggesting that its nominal successes might be built on unstable foundations.

Despite the nominal record high of the S&P 500, when adjusted for M2 growth it reflects a long struggle to return to levels seen in 2000, highlighting that it took over two decades of money supply expansion for that achievement. This suggests that the addition of new dollars requires increasingly more effort and comes with smaller gains.

The analysis calls for caution. Observing that if bitcoin — often the most liquidity-sensitive asset — shows signs of weakening against money supply growth, it could potentially foreshadow broader issues in the equities market.