Key Points
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Bitcoin thrives when there’s a lot of liquidity in the financial system.
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That doesn’t describe current conditions.
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Buying a little bit probably isn’t a bad idea.
A handful of the indicators that forecast Bitcoin‘s (CRYPTO: BTC) biggest moves track the raw volume of money sloshing through the global financial system. When capital is abundant and cheap, Bitcoin has historically been among the first assets to rally, but when liquidity dries up, it’s often among the first to fall.
With that in mind, let’s take a look at three of the most important signals to watch to understand when the conditions are favorable for Bitcoin to run.
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A golden coin with the Bitcoin logo floats on top of a screen displaying computer code.
Image source: Getty Images.
1. Money supply growth
The M2 money supply measures all the cash, savings deposits, and money market balances in an economy. Global M2 is near $101 trillion, with its three-month growth rate at an elevated 4.3%. Historically, Bitcoin bull markets have aligned with periods of accelerating M2 expansion.
The catch is that since mid-2025, Bitcoin’s price action has decoupled from M2 growth, perhaps as a result of increasing ownership by financial institutions; it’s presently unclear if the relationship is permanently decoupled.
The smarter signal to watch isn’t M2’s absolute level but its rate of acceleration and which central banks are driving it. If U.S. and European M2 begin growing faster, that capital is more likely to reach Bitcoin through institutional channels like spot Bitcoin exchange-traded funds (ETFs).
2. Bank reserves and central bank balance sheets
Bank reserves, which are the deposits banks hold at a country’s central bank, are a big determinant in how much liquidity the financial system has to deploy. When a central bank like the U.S. Federal Reserve expands its balance sheet by purchasing securities, it injects fresh reserves into the banking system, thereby loosening the prevailing financial conditions and making it cheaper for institutions to borrow and subsequently invest in risk assets like Bitcoin. The reverse process, quantitative tightening (QT), drains reserves and constrains that flow.
Reserve balances at the Federal Reserve were $3.1 trillion in early April, while the Fed’s total balance sheet was approximately $6.7 trillion, which is down by $33 billion compared to a year ago. That fairly mild shrinkage is a headwind for Bitcoin’s liquidity in the U.S. even though other central banks are moving in the opposite direction.
3. Price of oil
The price of energy factors into the prices of most goods and services. Therefore, the price of oil is a significant determinant of inflation and thus central bank activity as well.
Crude oil started 2026 near $61 per barrel before the Iran conflict and closure of the Strait of Hormuz sent the price of Brent above $118 by late March — the sharpest inflation-adjusted quarterly surge since at least 1988. On Friday morning, U.S. President Donald Trump and Iran said the Strait of Hormuz was open, but in a social media post, Trump said “…the naval blockade will remain in full force and effect as it pertains to Iran only…” but indicated that could change very soon. We’ll see how things play out.
When the price of crude oil spikes, inflation expectations rise, causing central banks to delay rate cuts, and then the liquidity that Bitcoin depends on gets choked off, assuming there are no stronger mitigating factors working in the opposite direction.
Oil is the most important signal to watch at the moment because it governs the others. Essentially, right now the conflict with Iran determines the direction of inflation via constraining oil supply and pushing up oil prices, which in turn drives central bank decisions, which then shape both M2 and bank reserves.
A durable decline in crude oil back toward the $70 to $80 range would likely uncork the liquidity conditions that historically precede a Bitcoin rally, but that would require a new and stable situation in the Strait of Hormuz. A renewed spike above $110 or beyond would do the opposite — and potentially very rapidly.
Use this signal and the others discussed above to calibrate how much risk you’re willing to take in this market. If you’re already sufficiently diversified and you’re wondering what to do, assuming you don’t need the money within the next five years, accumulating Bitcoin in small quantities here is likely a decent approach.
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Alex Carchidi has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.