Many people pay attention to the rise and fall of Bitcoin and Ethereum, but few truly understand the fundamental factors driving asset prices behind the scenes. Recently, I’ve been pondering a question: why do cryptocurrencies sometimes surge dramatically, and other times plummet? The answer is closely related to two seemingly dull economic indicators: M1 and M2.

M1 is the most liquid part of the money supply, including cash, demand deposits, and checking accounts. Simply put, M1 is the money in the economy that is easiest to spend or invest. M2 is broader, including all of M1 plus savings deposits, money market funds, and other assets with slightly lower liquidity but still quickly convertible into cash. The Federal Reserve used to publish M3 data, but since 2006, it has stopped, though M1 and M2 remain the most important indicators for observing economic liquidity.

The logic here is quite interesting. When the central bank releases liquidity, causing M1 and M2 to increase, more money is circulating in the market, borrowing costs decrease, and consumer and business confidence strengthen. What happens then? Assets like stocks, real estate, and cryptocurrencies all tend to rise. But crucially, cryptocurrencies often benefit more than traditional stocks in this high-liquidity environment.

Why? Because many people see cryptocurrencies as a hedge against fiat currency devaluation, and retail investors, with more disposable income, tend to allocate some of it to speculative assets. The Bitcoin bull market from 2020 to 2021 is a classic example. During that period, M2 expanded significantly, flooding the market with liquidity, and Bitcoin, Ethereum, and various altcoins all experienced a big surge.

Conversely, when M1 and M2 contract, the situation is completely different. Liquidity tightening means less money in the market, and speculative capital drops sharply. At this point, cryptocurrencies often fall more than stocks, with even greater volatility. Investors start seeking safe havens, shifting into cash or bonds, which puts selling pressure on cryptocurrencies. If regulatory concerns also intensify, the sell-off can accelerate further.

So, if you want to understand the overall trend of the crypto market, instead of obsessively watching candlestick charts every day, it’s better to pay attention to the trend changes of M1 and M2. These two indicators often reflect liquidity environment shifts in advance, influencing the performance of the entire asset market. Of course, this is just one of many influencing factors, but it’s definitely worth paying attention to.