Produced by | OKG Research
Author: Hedy Bi
On Tuesday, the reversal trend of the "Trump deal" overnight affected the Bitcoin market. The price of Bitcoin once surged to about $99,000 and then quickly fell back to below $93,000, with the largest drop exceeding 6%. This was due to rumors that Israel and Lebanon were expected to reach a ceasefire agreement, which caused market shock. Not only Bitcoin, but also gold and crude oil prices fell sharply.
Bitcoin's growth performance in the past month (40%+) has also magnified the risk sensitivity of its investors. Is this 40% gain the beginning or the end? The author believes that this is the short-term impact of a single event. External macroeconomic conditions remain unchanged for a long time, and liquidity may not allow this cycle to come to an abrupt end.
Liquidity is the “cause” of risky assets
From a macro perspective, on September 18, 2024, the Federal Reserve cut interest rates by 50 basis points to 4.75%-5.00% for the first time since 2020, ending a 525 basis point rate hike cycle. As Bobby Axelrod said in Billions, "Power is not everything, but without power you are nothing." The Fed's influence on Bitcoin has caused Bitcoin to find a balance between the flood of liquidity and the need to hedge inflation. As a tool that both expands US stocks and hedges inflation, the interest rate cut releases liquidity and injects a broader space into risky assets. Potential economic fluctuations and policy uncertainties make crypto assets such as Bitcoin an option for "hedging real-world risks."
Image credit: Christopher T. Saunders, SHOWTIME
As Trump returns to power and forms a new team, the increase in government spending will further boost market liquidity by implementing a series of fiscal stimulus policies to ensure "America First". Not only that, Trump proposed a plan to establish a national Bitcoin reserve during the campaign to use cryptocurrencies to weaken the dollar's competitors. As Trump and his team consider appointing regulatory officials who are friendly to cryptocurrencies, this also promotes the establishment of a US-led international cryptocurrency regulatory framework.
However, there are also voices questioning the rate cut and shouting "the financial crisis is coming". According to MacroMicro's US Recession Index (Probability), the probability of a US recession in November 2024 is 24.9%. "Looking for a sword on a boat" Compared with the last recession caused by the financial crisis, if this round is a recession cycle, the recession may peak within 6 months. In the game of liquidity and hedging inflation, Bitcoin's current round of economic adjustments reflects more its sensitivity to changes in liquidity.
Image source: MacroMicro
Agency: Exceeding the critical threshold of 5%
Under such macroeconomic conditions, Bitcoin has also been favored by institutional liquidity. Since the opening of the Bitcoin spot ETF channel in January 2024, according to statistics from OKEx Research Institute on November 21, global Bitcoin spot ETFs have accounted for 5.63% of the total supply of Bitcoin. A 5% shareholding ratio is usually a key threshold in the financial industry. For example, in the regulations of the U.S. Securities and Exchange Commission (SEC), shareholders holding more than 5% of the shares need to report to the SEC.
Bitcoin holdings distribution | Image source: OKG Research, bitcointreasuries, public news
In addition to Bitcoin spot ETFs, listed companies have also taken action in such a political environment. According to incomplete statistics from the OKLink Research Institute, since November 6, 17 US and Japanese listed companies have announced that they hold or their boards of directors have approved Bitcoin as a war reserve asset. Among them, the most prominent MicroStrategy purchased 55,500 Bitcoins between November 18 and 24 at a price of US$5.4 billion. Currently, only 0.01% of listed companies in the world hold Bitcoin, which means that this is just the tip of the iceberg of the purchasing power of large institutions, and the market is still in the "elite experimental stage."
OKLink Research Institute conservatively estimates that the measurable funds entering Bitcoin in the next year will be approximately US$2.28 trillion (Note 1). The volume of these assets can push the price of Bitcoin to around US$200,000, which is consistent with the forecasts of financial institutions such as Bernstein, BCA Research and Standard Chartered Bank.
Estimated amount of funds to be invested by institutions｜Image source: OKG Research (Note 1)
Bubbles come first, how to hedge against rising milk prices?
As events fueled the liquidity, the market questioned whether it was excessive, from "Trump deal" to "Trump bubble". Tyler Cowen, author of "The Great Stagnation", believes that bubbles are conducive to the concentrated investment of capital in emerging industries and innovative projects, which will increase the market's acceptance of high-risk early projects, thereby encouraging entrepreneurs and investors to take bold risks and innovate. Just as the infrastructure left after the "Internet bubble" in the 1990s burst in 2000 - fiber optic network and data center construction, laid the foundation for the Internet + era. After the Trump administration's spending (economic stimulus policy) timeline is clear, if the government spending is more aggressive, the market liquidity is excessive and there is a suspicion of "bubble", the crypto market will also be "driven up" by liquidity, allowing "value to catch up with price".
What is more noteworthy is that in the qualitative characterization of Bitcoin, the author has proposed that Bitcoin is both an amplifier of US stocks and a hedge against real-world risks, which makes Bitcoin swing in the game of liquidity and inflation hedging. In terms of the prices that the public perceives the most, from 2019 to 2024, the average price of milk in the United States rose from about US$2.58 per gallon to US$3.86 per gallon, an increase of about 49.22%. During this period, Bitcoin rose by about 1025%, and gold rose by about 73%, slightly exceeding the S&P 500 (about 40%), the representative index of risky assets in the US stock market.
Even some countries have chosen to invest in Bitcoin to protect their wealth from inflation. For example, El Salvador and the Central African Republic have adopted Bitcoin as legal tender, and Bhutan has mined Bitcoin, trying to use its scarcity and decentralization to hedge against inflation risks.
In the current macro environment, regardless of short-term fluctuations, the scarcity, decentralization and global liquidity of Bitcoin, which is fixed at 21 million coins, remain unchanged. Its process of becoming a value storage is being accelerated by the rush of institutions and listed companies to allocate it. This financial experiment that started with cypherpunks will eventually find its foothold in the real world.
Note 1: The amount of funds is calculated as follows:
a. Government funds and pension funds select countries, states and regions that currently allow investment in Bitcoin, and choose 2% as the investment ratio, as well as different CAGRs for each country and region as the growth rate for the next year, such as 8.9% for the United States, 4.22% for the United Kingdom, and 3% for the Nordic countries on average.
b. The strategic reserve funds of listed companies are calculated based on the cash assets (market value multiplied by 5%, Microsoft's ratio is 9.5%) of the world's major stock markets (the United States, Germany, Japan, the United Kingdom, South Korea, Hong Kong, Singapore, India, Brazil, Australia, Canada, and Taiwan), multiplied by the growth coefficient (calculated, the CAGR of the global stock market in the past ten years is 9.68%) and multiplied by the investment ratio of 10%.
c. Private companies are calculated synchronously based on the 90% of the proportion of publicly listed companies that have been disclosed so far. d. According to survey reports from Morgan Stanley, Capgemini, Accenture, etc., 71% of high-net-worth individuals have invested in Bitcoin. The remaining high-net-worth individuals to be invested are selected and their wealth scale is multiplied by the growth coefficient of 4.5% and then multiplied by the investment ratio of 5% for calculation.
*The content described in this article is only for market observation and trend analysis and should not be regarded as specific investment advice.
