BTC Valuation Adjusted for Money Supply & Dollar Strength
Hey fellow traders,
So my custom ticker formula is BTCUSD*DXY/M2. So this boils down to:
Let's examine WHY we are doing this. When DXY is falling, the US Dollar is losing value, which prompts commodities or alternative investments like Bitcoin, to flourish. When DXY is rising, investors are staying away from speculative assets and are comfortable with their dollars, which promotes investments like Bitcoin to take a beating. This is to say that Bitcoin and DXY has an inverse relationship - i.e. when one is falling, the other is rising and vice versa. If we just dust off our old middle school math notebooks, we can remember that if A and B has an inverse relationship, then A*B equals a constant k, i.e. A * B = K. This constant K essentially tells us how much we can expect A to rise when B takes a beating. By plotting BTCUSD*DXY we would have plotted how this constant k is changing over time. This constant k gives us a metric of how strong BTC is. Greater the constant, greater the possible increase in BTC value in the next DXY bear cycle.
Okay, we now understand why we multiply by DXY; now we have to answer why we divide by M2.
M2 as a measurement of the money supply is a critical factor in the forecasting of issues like inflation (Investopedia). It is a metric of how many dollars are in circulation. Okay then, why do we divide by it. Well, let's think about the relationship between money supply and BTC. When more US dollars are printed, the US Dollar becomes less valuable, so a 20K BTC valuation today might be worth less than the 20K BTC valuation 3 years ago. Essentially, we are adjusting for inflation. When more dollars are printed, then per inflation, everything would be more expensive, including commodities like gold or alternative investments like Bitcoin. So as the number of dollars in circulation increase (radically - like this year), so would the price of BTC. Bitcoin and Money Supply has a proportional relationship - i.e. when one is falling, the other is falling and vice versa. Looking at our old middle school math notebooks again, if A and B has a proportional relationship, then A / B equals a constant k, i,e, A / B = k. This constant K again tells us the valuation of BTC when adjusted for inflation.
So by doing both operations, we can adjust the valuation of BTC per inflation and USDollar Strength.
The findings are very interesting, to say the least.
So my custom ticker formula is BTCUSD*DXY/M2. So this boils down to:
- Multiplying BTCUSD by Dollar Strength Index
- Dividing by M2 (The total number of dollars in circulation)
Let's examine WHY we are doing this. When DXY is falling, the US Dollar is losing value, which prompts commodities or alternative investments like Bitcoin, to flourish. When DXY is rising, investors are staying away from speculative assets and are comfortable with their dollars, which promotes investments like Bitcoin to take a beating. This is to say that Bitcoin and DXY has an inverse relationship - i.e. when one is falling, the other is rising and vice versa. If we just dust off our old middle school math notebooks, we can remember that if A and B has an inverse relationship, then A*B equals a constant k, i.e. A * B = K. This constant K essentially tells us how much we can expect A to rise when B takes a beating. By plotting BTCUSD*DXY we would have plotted how this constant k is changing over time. This constant k gives us a metric of how strong BTC is. Greater the constant, greater the possible increase in BTC value in the next DXY bear cycle.
Okay, we now understand why we multiply by DXY; now we have to answer why we divide by M2.
M2 as a measurement of the money supply is a critical factor in the forecasting of issues like inflation (Investopedia). It is a metric of how many dollars are in circulation. Okay then, why do we divide by it. Well, let's think about the relationship between money supply and BTC. When more US dollars are printed, the US Dollar becomes less valuable, so a 20K BTC valuation today might be worth less than the 20K BTC valuation 3 years ago. Essentially, we are adjusting for inflation. When more dollars are printed, then per inflation, everything would be more expensive, including commodities like gold or alternative investments like Bitcoin. So as the number of dollars in circulation increase (radically - like this year), so would the price of BTC. Bitcoin and Money Supply has a proportional relationship - i.e. when one is falling, the other is falling and vice versa. Looking at our old middle school math notebooks again, if A and B has a proportional relationship, then A / B equals a constant k, i,e, A / B = k. This constant K again tells us the valuation of BTC when adjusted for inflation.
So by doing both operations, we can adjust the valuation of BTC per inflation and USDollar Strength.
The findings are very interesting, to say the least.
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Here's how our correction fared to 2017 top
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