Table of Contents
China’s massive $47 trillion money supply, the largest in the world, is currently expanding as the nation attempts to navigate a debt crisis triggered by its 2021 property market collapse. However, a "liquidity wall" remains firmly in place, preventing this capital from entering the Bitcoin market due to strict government bans, forcing 1.4 billion people toward gold as the primary escape valve for currency debasement. While global liquidity recently hit an all-time high of $188.8 trillion, the divergence between Eastern and Western capital flows is creating a stark performance gap between traditional and digital "hard" assets.
Key Points
- China’s M2 money supply has reached $47 trillion, more than double the $22 trillion held by the United States, and is growing at roughly 8% annually.
- Following the Evergrande property crash in 2021, the People’s Bank of China (PBOC) has adopted an aggressive monetary expansion strategy similar to Japan’s Abenomics to inflate away domestic debt.
- Gold exhibits significantly higher capital efficiency than Bitcoin; for every dollar that flowed into gold in early 2024, its market cap increased by $82, compared to just $17 for Bitcoin.
- Despite its reputation as "digital gold," Bitcoin remains 99% correlated with U.S. technology stocks and software-as-a-service (SaaS) sectors, leaving it vulnerable to traditional finance deleveraging.
The Liquidity Wall: China’s "Japan Playbook"
The Chinese economy is currently grappling with the aftermath of a catastrophic property market decline. To prevent a "lost decade" similar to Japan’s experience in the late 1990s, Chinese authorities have reduced interest rates to 1.4% and unlocked $140 billion in bank liquidity. This strategy aims to devalue the currency enough to make massive debts easier to service, a tactic famously used in historical periods of hyperinflation.
According to macroeconomic researcher Alessandro, the strategy is a calculated sacrifice of the currency to save the broader economy. To protect their wealth from this debasement, Chinese investors are flooding into gold, as the domestic ban on Bitcoin prevents them from accessing the digital alternative. Central bank data confirms this trend, showing that China has accumulated more gold since 2022 than any other central bank, though experts suggest actual figures may be under-reported by two to four times.
"Holding hard assets basically solves this problem [of debt inflation]. And this is why we are seeing China go through this cycle where gold is being used as the escape valve for their currency debasement."
Market Inefficiency and Asymmetric Capital Flows
A critical factor hindering Bitcoin’s growth relative to gold is capital efficiency. Because a vast majority of the world's gold supply is locked in jewelry or central bank vaults, the available "floating" supply is small, meaning new inflows move the price significantly. In contrast, Bitcoin is highly liquid and transparently traded, which paradoxically makes its market cap less responsive to every dollar of inflow.
The Efficiency Gap
- Gold: From the start of 2024, $269 billion in inflows resulted in a $22 trillion market cap increase.
- Bitcoin: During the same period, $95 billion in inflows resulted in only a $1.6 trillion market cap increase.
- The Result: Gold is estimated to be at least four times more capital efficient than Bitcoin in terms of price movement per dollar invested.
This efficiency gap is exacerbated by the fact that the most aggressive liquidity expansion is currently coming from the East. While the PBOC is printing money, the Federal Reserve, the European Central Bank, and the Bank of England have largely remained in contractionary or neutral stances. Because Bitcoin is primarily accessible to these Western markets, it is missing out on the massive surge of capital currently originating in China.
The Tech Correlation Trap
Analysis of market data reveals that Bitcoin has failed to decouple from the U.S. technology sector. Since 2019, Bitcoin has traded almost one-to-one with the IGV ETF (S&P Interactive Software & Services). This correlation exists because institutional investors trade Bitcoin in the same portfolios as tech stocks. When hedge funds face volatility, they often unwind Bitcoin positions alongside software assets.
This was evidenced during the market volatility on February 5th, when BlackRock’s IBIT saw record volume during a tech sell-off. As the "basis trade" yield spiked from 3.5% to 9%, hedge funds were forced to liquidate positions, dragging Bitcoin down despite its supposed status as an independent store of value. Gold, conversely, remains uncorrelated with tech, sitting in a separate pool of capital that provides genuine diversification for global funds.
"Bitcoin trades like software as a service... it sits inside the same trading book as traditional tech, which means that when these trades get unwound, Bitcoin gets unwound, too."
Looking ahead, Bitcoin’s price trajectory may depend on a shift in Western monetary policy. While China continues to fuel gold’s ascent through aggressive M2 expansion, Bitcoin investors are watching for signs that the Federal Reserve or European Central Bank will pivot back toward liquidity expansion. Until Bitcoin can breach the "liquidity wall" in the East or decouple from the U.S. tech sector, it likely remains a barometer for Western risk appetite rather than a global safe haven.
