M2 rise slows down, the crypto market should be alert.

A recent phenomenon is worth following: the Fed's M2 growth rate skyrocketed from 27% in 2021 and then turned negative by the end of 2022. Behind this seemingly dull data, it is actually determining your investment returns.

What is M2?

In simple terms, M2 is a measure of liquidity. It includes the cash in your wallet, the demand deposits in your bank account (the M1 part), plus savings accounts, time deposits, and money market funds—assets that can be quickly converted into cash.

In one sentence: The larger M2 = more money in the market = investors are more willing to spend.

How M2 Affects Your Investments

This is key. When M2 surges (such as during the COVID pandemic), the following will happen:

1. Capital rushes towards high-risk assets

Low interest rates + lots of money = both retail and institutional investors are looking for returns. BTC, ETH, and altcoins are in demand. The M2 growth was an important driving force during the bull market of 2020-2021.

2. Inflation is knocking at the door

At the beginning of 2021, M2 grew by 27% year-on-year, which is a historical level of increase. What was the result? In 2022, inflation soared to a 40-year high, and the Fed had to aggressively raise interest rates.

3. High-risk assets are the first to be affected

When the central bank begins to tighten (raise interest rates, limit M2 growth), funds will withdraw from high-risk assets like cryptocurrencies and growth stocks and flow into safe assets (government bonds, gold). At the end of 2022, M2 turned negative, and the cryptocurrency market was in shambles — this is not a coincidence.

The Four Components of M2

M1 (Most Basic)

• cash paper currency
• Demand deposit (can be withdrawn at any time)
• Traveler's check
• Other checking accounts

Quasi-currency (unique to M2)

• Savings Account (interest-bearing but with withdrawal limitations)
• Certificate of Deposit/CD (the lock-in period is usually longer)
• Money Market Fund (investing in short-term bonds)

The Driving Forces Behind M2

Central Bank Policy: The Fed adjusts interest rates and reserve requirements, directly controlling the M2 growth rate.

Fiscal Stimulus: Government cash payments (such as pandemic subsidies) immediately increase liquidity.

Willingness of banks to lend: The more banks lend, the larger M2 becomes; conversely, the same is true.

Consumer Confidence: If you and I both decide to save money instead of spending it, the growth rate of M2 will slow down.

The Subtle Relationship Between M2 and the Cryptocurrency Market

Data speaks:

• M2 High Growth Period (2020-2021): BTC soared from 10k to 69k, ETH from 730 to 4900.
• M2 Negative Growth Period (2022): BTC fell to 16.5k, and the market entered a bear market.
• M2 Stable Recovery Period (Mid to Late 2023): BTC rebounds to 33k+, indicating funds are re-entering the market.

Why? Because in an environment of “plenty of money and low interest rates,” investors are willing to take risks for high returns. The high volatility of crypto assets becomes an advantage. But when M2 tightens, every penny becomes precious, and risk assets are immediately sold off.

What is the current status of M2

Since the end of 2023, the growth rate of M2 has stabilized somewhat, but it is far from the frenzy during the pandemic. The central bank's stance remains cautious—although inflation has fallen, it is still above the target.

Insights for Investors:

• If the central bank signals to continue raising interest rates or M2 growth slows down → reduce high-risk positions
• If M2 begins to grow rapidly + interest rates peak → this is a signal for a rebound in risk assets.

Bottom Line

M2 is not just a concept in economics textbooks; it directly impacts your investment portfolio. Those looking to make money should monitor M2 data just as they do stock prices. Every policy shift by the central bank is reflected in the M2 numbers in advance.

Remember a formula: M2↑ + Interest rate↓ = Crypto/Stock market rise; M2↓ + Interest rate↑ = Risk assets plummet.

Learning to read M2 data is learning to gauge the central bank's intentions for investment.