I've been thinking about something that many crypto investors don’t quite understand: what M2 is and why it should matter to you.

Basically, M2 is the measure of how much real money is circulating in the economy. Not only the cash in your pocket, but also money in checking accounts, savings, certificates of deposit, and money market funds. That is, everything that can be quickly converted into cash.

The composition is quite simple: first there’s M1, which is the most liquid (efectivo, tarjetas de débito, cheques). Then come interest-bearing savings accounts, time deposits or certificates of deposit, and money market funds that offer higher yields but with restrictions.

Now, why does this matter for people who trade in crypto? Here’s where it gets interesting. When M2 grows rapidly, it means there’s a lot of money available in the system. Central banks lower interest rates, loans become cheaper, and people look for where to invest that money. Some put it into stocks, others into bonds, and many into cryptocurrencies looking for higher returns. During periods of cheap money, the prices of Bitcoin, Ethereum, and other assets tend to rise.

But when M2 starts contracting or grows very slowly, the scenario changes completely. The Reserva Federal raises interest rates to fight inflation, loans become expensive, and investors move away from risk assets. Cryptocurrencies are often among the first to fall in these moments.

Look at what happened during COVID-19. The EE.UU. government injected money massively, increased unemployment benefits, and the Reserva Federal lowered rates to almost zero. The result was an increase of nearly 27% in M2 in early 2021, the biggest in years. That helped push crypto prices higher. But when in 2022 the Fed began raising rates aggressively to control inflation, M2 contracted and turned negative toward the end of the year. And you know what happened to crypto markets in 2022.

The key point is that M2 isn’t just a number for economists. It’s an indicator that tells you which direction the money in the system is moving. When it grows, there’s more liquidity looking for opportunities. When it contracts, the economy cools down. Central banks use M2 to make decisions about interest rates, and those decisions have a domino effect across all markets: stocks, bonds, cryptocurrencies.

The relationship between M2 and inflation is also crucial. More money circulating without the economy producing more goods and services = higher prices. Less money circulating = downward pressure on prices, but also a risk of deceleration or recession.

That’s why, if you want to understand where markets are headed, especially in crypto, keep an eye on M2. It’s not the only variable, but it’s one of the most important. When you see M2 starting to grow again after a contraction, that’s usually a good time to start paying attention to the markets. And when you see contraction, it’s time to be more cautious with volatile assets.