Scarcity Will Win
Investors,
Fundamentally, Bitcoin was created to provide a private-market solution to a fiat system wherein the ever-increasing money supply of U.S. dollars is going to dilute the value of its purchasing power. As the supply of U.S. dollars increases, the dollar value of all goods, services, and assets should rise simply because the purchasing power of the dollar is declining. Considering that Bitcoin has the highest degree of scarcity across the entire financial market, investors have recognized that it is poised to be the largest beneficiary of fiat purchasing power dilution.
And the results speak for themselves:
🔵 M2 Money Supply
🟠 Bitcoin
It’s been the fastest horse in the race, doing the best to offset a persistent increase in the USD money supply. Other assets, like the S&P 500, have done a solid job of keeping up with the growth in M2, but it’s clear that Bitcoin has been better.
What’s interesting about this is the simple fact that M2 money supply has been declining since mid-2022 after the Fed started their rate hike program and balance sheet runoff. While this initially created headwinds for asset prices, across the board, the markets have been admirably resilient to this ongoing decline in M2 in 2023.
Some might argue that this divergence is happening because the market is forward-looking and is pricing in a return to easy money that will result in M2 rising again.
Some might argue that this divergence is happening because M2 is not a sufficient measure to track the dilution of purchasing power. As such, they would say that liquidity is actually being portrayed by other variables (a valid point) that have been rising in 2023; therefore, this “divergence” is simply a facade.
Some might argue that this divergence is happening because the market is irrational and investors are living in fairy-tale land, completely detached from reality.
Your guess is as good as mine, but I fall somewhere between the first & second camps.
What I do know is that Bitcoin’s supply is finite while its demand is exponential and it’s being priced in fiat currencies which are aren’t scarce. It’s track record of success, currently valued at $817Bn, is proof that this early-stage monetary experiment is working and I feel comfortable “betting” that it will continue to work and warrant a higher valuation over time.
In the remainder of this report, our focus will cover:
A review of stock market valuations, determining whether or not the market is expensive, detached from reality, or in a “just right” place.
Measuring different levels of sentiment & positioning within the market to identify extremes (or the lack thereof) as a contrarian indicator.
S&P 500 under-the-hood metrics to fully diagnose how stocks are performing. At the end of the day, we’re focused on a market of stocks, not the “stock market”, so it’s vital to get a pulse of how individual stocks are performing.
Finally, my favorite chart in the stock market right now, highlighting a key inter-market relationship.
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