Is the "amount of money in the world" the key to Bitcoin's price? A beginner's guide to "liquidity"
Hello! I'm John, a blogger who specializes in explaining blockchain technology news in a way that anyone can understand.
Have you ever wondered, "Why does the price of Bitcoin go up and down?" "Because it's become popular?" "Because there's bad news?" Of course, that's one reason. But in fact, there's something much bigger that's deeply involved in the price of Bitcoin.
This time, the key"Liquidity"I would like to explain this word in the simplest way possible!
First of all, what exactly is "liquidity"?
When you hear the word "liquidity," it sounds complicated, but the image is actually very simple.
Liquidity is simply the amount of money in circulation.Imagine the entire economy as one big river. Liquidity is like the amount of water flowing through that river.
- High liquidity: The state of a river is rising and flowing vigorously. This means that there is a lot of money in the world, and people and companies are proactive in investing and consuming.
- Low liquidity: The image of a dried up river and its stagnant flow is like there is less money in the world and people are tightening their purse strings.
To measure this "amount of money," economic experts use"M2"This is the total of the cash we have and the deposits we have in the bank, and it is an important number that shows how much liquidity we have.
Why does increasing liquidity increase the price of Bitcoin?
So, how is this relationship between "the amount of money in the world (liquidity)" and Bitcoin? The original article points out that this relationship is a very important factor that drives the price of Bitcoin. Here's how it works.
Step 1: The world is flooded with money
First, the FRB (the central bank of the United States, similar to the Bank of Japan in Japan) and other central banks around the world sometimes increase the supply of money in the world in an attempt to improve the economy. This is called "monetary easing." When this happens, money floods the market, and liquidity becomes very high.
Step 2: Start looking for a place to put your extra money
People and companies have a lot of money on hand. However, if they just leave it in the bank, it may lose value due to inflation (when prices rise and the value of money decreases). So people start thinking about investing their money somewhere to increase its value.
Step 3: Bitcoin becomes an attractive investment
The focus here is on Bitcoin. The biggest feature of Bitcoin is:The maximum number of coins that can be issued is set at 2100 million.Unlike national currencies, which central banks can print as much as they want, cryptocurrencies are considered to be assets that do not lose their value easily because of their "scarcity value." In a situation where money is abundant, this property of being "limited in number" is very attractive.
To summarize this process, it is as follows:
- ① The central bank increases the money supply (liquidity increases)
- ② Money floods the market, and investors look for places to put it.
- 3) Bitcoin, which has a limited supply, will become an attractive store of value.
- ④ Money will flow into Bitcoin, demand will increase, and the price will rise.
As the original article points out, the timing of past large increases in Bitcoin prices has actually surprisingly coincided with periods of global liquidity (M2) expansion.
Summary: John's perspective
I think this perspective of "liquidity" is really interesting in understanding Bitcoin. The price of Bitcoin is not simply determined by events in the virtual currency world, but is directly influenced by the large "flow of money" in the entire global economy.
From now on, when you hear phrases like "Central banks implement monetary easing" in the economic news, if you think to yourself, "Oh, this is about changing the amount of money in the world. Maybe this will have an impact on the price of Bitcoin too?" you may be able to enjoy the news even more.
This article is based on the following original articles and is summarized from the author's perspective:
Why Liquidity Matters More Than Ever For Bitcoin