Recently, many people have been discussing the impact of M1 on the cryptocurrency market, but actually, many still have a somewhat vague understanding of this concept. Let me give a simple explanation.

M1 is essentially the most basic money supply of a country, used as a medium of exchange. It includes cash in circulation, demand deposits, and checking accounts. Why emphasize M1 specifically? Because it represents the most liquid money, which can be used immediately for payments or converted into cash. In comparison, M2 and M3 include deposits and investments that can also be converted into cash, but require more time.

The Federal Reserve used to track three monetary indicators: M1, M2, and M3. But since 2006, they have stopped publishing M3 data. Now, economists mainly use M1 to measure a country's liquidity.

Here's an interesting comparison. M1 is purely transactional currency, while M2 adds savings accounts and short-term deposits on top of M1, making it broader. M3 is even more extensive, including all forms of savings deposits, time deposits, and institutional money market funds. Theoretically, M3 is the most comprehensive, but the Federal Reserve no longer tracks it.

So, what does M1 growth mean for the crypto market? When M1 and M2 increase, it indicates ample market liquidity, easier borrowing, and greater confidence among consumers and businesses. Asset prices generally rise during this time, including stocks, real estate, and of course, cryptocurrencies. I’ve noticed that in high-liquidity environments, crypto assets tend to perform even better than stocks. This is because retail investors have more idle funds to speculate, and the crypto market is seen as an alternative asset to hedge against fiat currency devaluation.

Looking back at the Bitcoin and Ethereum bull markets from 2020 to 2021, one of the driving forces was the Fed’s large-scale M2 expansion. During that period, liquidity was abundant, retail and institutional investors were chasing returns, and crypto assets became the most popular speculative investments.

Conversely, when M1 and M2 tighten, it’s a different story. Reduced liquidity means higher borrowing costs and a sharp decline in speculative activity. The crypto market often falls more sharply than stocks in such environments because of its inherent volatility. Investors start seeking safer assets, making cash and bonds more attractive. If there’s also regulatory pressure, the decline in the crypto market can become even steeper.

Therefore, understanding the concept of M1 is very helpful for predicting crypto market cycles. Next time you see news about money supply, think about what it might mean for your investment portfolio.