Economic Foundation for Bitcoin - Bitcoin and Monetary Dilution: A U.S. M2 Pricing Framework

Abstract

We present evidence that Bitcoin functions, at least in significant part, as a specialized store of value, and that its economic value is statistically related to monetary dilution. Data indicate that Bitcoin’s long-run price tracks the annual expansion of U.S. dollar money supply relative to Bitcoin’s implied market capitalization, a relationship reinforced by Bitcoin’s fixed-supply protocol design. The relationship is statistically significant across the sample tested, though the sample remains limited and the findings should be read as evidence supporting this thesis rather than as proof of it; further data and out-of-sample testing are needed. Backtested against annual year-end prices over the primary 2013–2024 sample, the model yields Pearson r = 0.896 and R² = 0.803 (log₁₀ basis), with all twelve primary-sample years within one order of magnitude of the model price. Directional accuracy is encouraging at 63.6% (7 of 11 transitions), below a simple always-positive benchmark. Beyond its statistical performance, the model has four important implications. First, Bitcoin possesses a quantitative, testable valuation framework: its price tracks the relationship between fiat monetary creation and the capacity of a fixed-supply asset to absorb reallocation demand. This supports the view that Bitcoin’s value is linked to a meaningful extent to monetary dilution. Second, as the empirical record deepens across additional monetary expansion and contraction regimes, confidence in the model’s predictive value should strengthen; each additional annual observation, and further out-of-sample testing, will add evidence one way or the other. Third, broad adoption of a shared pricing model may contribute to reducing Bitcoin’s price volatility over time, consistent with the pattern observed as other asset classes have matured around shared valuation conventions, though this market-structure effect remains a hypothesis rather than a demonstrated result. Finally, the analysis indicates that Bitcoin has shown a stronger relationship to U.S. M2 growth than gold under the methodology tested.