Recently, with the opening of the ETF channel, the "huge amount of funds" expected by the crypto market has not met expectations, and the liquidity shortage problem in the global financial market has spread to the crypto market. The opening of the new channel also means that the rules of the previous complex and mature market have collided with the culture and investment logic of the crypto market. As a result, the crypto market has changed from a nearly closed safe haven to a small boat in the vast ocean. The fundamental change in the nature of the market has also brought new challenges.
Bitcoin, no longer digital gold?
To understand the crypto market, we start with Bitcoin, which accounts for half of the market.
Pic: Dominance of Bitcoin and other crypto in the overall market from 2nd quarter of 2013 to 1st quarter of 2024
Source: statesman
Looking back at this year, we can observe several key events. For example, in April this year, the tension between Iran and Israel led to Iran's retaliatory actions. Although the reaction of the Asia-Pacific market was not reflected in the financial market, Bitcoin fell significantly. In addition, the US economic data not only affects the US financial market, but also touches the nerves of Bitcoin. For example, several times in the first half of the year, the number of unemployed people in the United States rose and exceeded expectations. The market believed that this prompted the central bank to adopt a more relaxed monetary policy, which could drive the rebound of US stocks and also drive the rise of Bitcoin.
In the past, we viewed Bitcoin as "digital gold" and believed that it was counter-cyclical to the US dollar. However, it now seems that Bitcoin is more like an "amplifier" for Nasdaq. Compared with traditional stocks and bonds, these new institutional investors lack fundamental analysis (financial indicators and cash flow analysis) for Bitcoin. Its value is mainly determined by market supply and demand and investment trust. Therefore, commodity attributes plus sentiment indicators have become the quantitative trends that institutional investors rely on. In addition, with the widespread use of leverage in the crypto market, Bitcoin is more volatile, which is a new market feature that we need to adapt to.
Compared with 2022, when there were seven interest rate hikes, the demand for cryptocurrencies has dropped significantly
Taking the U.S. market as an example, M2 (broad money supply) has been slowly declining since the first half of 2022. According to statistics from Macromicro.me, the seven Fed interest rate hikes from March to December 2022 caused the US market net liquidity index to show a rapid decline and has not increased since then. The U.S. interest rate hike policy in 2022 has had a significant impact on market liquidity, which has not maintained its previous growth. Subsequently, the encryption market demand has also decreased significantly.
We choose stablecoins to look deeper into the demand of the crypto market. Because the stablecoin issuance mechanism determines that its issuance can represent the market demand for the crypto market. In terms of the overall market value of stablecoins, it has risen by about US$30 billion since 2024 (about half a year). Compared with the second half of 2021 and the first half of 2022, the growth rate has significantly decreased. Moreover, 2021 to the first half of 2022 is exactly the time when liquidity in the global financial market is tightening. This means that the crypto market has also changed from a previous risk hedging market to a small boat in this vast ocean.
From this, we can roughly conclude that the general style of the entire crypto market has changed from a nearly closed market for hedging financial risks to a market that is more sensitive to the economy, and Bitcoin has also changed from "digital gold" to an "amplifier" of US stock markets such as Nasdaq. Economic indicators will affect liquidity in the market and will also directly affect the crypto market.
This OTC is different from that OTC, injecting liquidity into the market
Under the existing macroeconomic policies, how do we solve the liquidity problem in the crypto market? There are two common solutions: one is to promote the participation of institutional investors; the other is to improve market infrastructure. Here we focus on the first solution.
In promoting the participation of institutional investors, over-the-counter (OTC) trading is an indispensable channel or one that is currently ignored by the crypto market. Specifically, let's take the global Bitcoin as an example. According to CryptoQuant statistics, the daily balance of OTC trading desks fluctuates between 100,000 and 500,000 BTC (calculated at a BTC price of approximately $65,000, approximately $6.5 billion to $32.5 billion). In contrast, the average daily inflow of Bitcoin ETFs is approximately $122 million (Farside Invest data, as of July 5, UTC+8), which is equivalent to dozens to hundreds of times more than OTC trading.
The OTC that everyone is familiar with in the crypto market is slightly different. The OTC we are familiar with is more of a bridge between legal currency and cryptocurrency. This is because before the emergence of compliant channels such as ETFs, the OTC channel was the main channel accessible to the public. However, from the perspective of the financial market, the other two financial market functions of OTC - the main channel for large transactions and liquidity provision and market stability - need to be developed.
In terms of institutional investors, RWA is another frequently mentioned method. However, I believe that RWA needs to truly use crypto assets as accounting units to improve liquidity, and RWA should be issued on the public chain, rather than limited to alliance chains or private chains. At present, RWA is still mainly in the enterprise-level alliance chain or the alliance chain between financial institutions. For example, Hedera, which cooperated with Blackrock in April this year, tokenized the money market fund (MMF) using an incompletely decentralized public chain solution.
As the Web3 market continues to evolve, we can see its inherent changes. The crypto market has gradually transformed from a niche market that used to be a safe haven to a field that is highly sensitive to economic dynamics. Bitcoin has also transformed from "digital gold" to an "amplifier" for US stock markets such as Nasdaq. In response to the recent liquidity issues in the crypto market, we need to solve them in a multi-pronged way. Not only should we adapt to the fluctuations of the macroeconomic cycle, but we should also pay attention to and develop business areas that have been neglected in the past, so as to inject new vitality and enhance the stability and maturity of the market.
