Author: Hedy Bi, OKG Research
This Tuesday, the reversal trend of the overnight 'Trump trade' affected the Bitcoin market. Bitcoin's price surged to about $99,000 before quickly falling back below $93,000, with a maximum decline of over 6%. This was due to market turbulence triggered by rumors of a potential ceasefire agreement between Israel and Lebanon. Not only Bitcoin, but gold and oil prices also plummeted significantly.
Bitcoin's growth performance over the past month (over 40%) has amplified its investors' sensitivity to risk. Is this 40% gain a beginning or an end? The author believes this is a short-term impact of a single event, and with external macro conditions remaining unchanged in the long run, liquidity may not allow this cycle to abruptly stop.
Liquidity is the 'cause' of risk 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 rate hike cycle of 525 basis points. As Bobby Axelrod said, 'Power is not everything, but without power, you are nothing.' The Federal Reserve's influence on Bitcoin has led to a search for a balance between excess liquidity and inflation hedging demands. As a tool that serves both as a US stock amplifier and an inflation hedge, interest rate cuts have released liquidity, providing broader space for risk assets. Potential economic fluctuations and policy uncertainties have made cryptocurrencies like Bitcoin a choice for 'hedging real-world risks.'
With Trump back in power and forming a new team, the government will implement a series of fiscal stimulus policies to ensure 'America First,' with increased government spending further driving market liquidity. Moreover, Trump proposed a plan during his campaign to establish a national Bitcoin reserve, aiming to weaken the dollar's competitors using cryptocurrency. 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 cuts, shouting that 'a financial crisis is imminent.' According to MacroMicro's US recession index (likelihood), the probability of a US recession in November 2024 is 24.9%. Compared to the last recession triggered by the financial crisis, if this round is a recession cycle, the recession may peak within 6 months. In the game between liquidity and inflation hedging, Bitcoin in this economic adjustment reflects more its sensitivity to changes in liquidity.
Institutions: Exceeded the key threshold of 5%
Under such macroeconomic conditions, Bitcoin has also attracted the favor of institutional liquidity. Since the Bitcoin spot ETF channel opened 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 Bitcoin supply. A 5% stake is typically a key threshold in the financial industry; for example, according to SEC regulations, shareholders owning more than 5% must report to the SEC.
In addition to Bitcoin spot ETFs, publicly listed companies have also taken actions in such a political environment. According to incomplete statistics from the Okex Research Institute, since November 6, 17 publicly listed companies in the US and Japan have announced holding or board approval for Bitcoin as a strategic asset. Among them, the most prominent is MicroStrategy, which purchased 55,500 Bitcoins for $5.4 billion between November 18 and 24. Currently, only 0.01% of publicly listed companies globally hold Bitcoin, indicating that this is just the tip of the iceberg for large institutional buying power, and the market is still in the 'elite experimental stage.'
The Okex Research Institute conservatively estimates that the statistically significant funds entering Bitcoin in the next year will be approximately $2.28 trillion (note 1). This asset volume could drive Bitcoin's price up to around $200,000, consistent with predictions from Bernstein, BCA Research, and Standard Chartered Bank.
Bubbles precede; how to hedge against milk price increases?
The liquidity benefits, driven by various events, have led the market to question whether it is excessive, transforming from the 'Trump trade' to the 'Trump bubble.' Tyler Cowen, author of The Great Stagnation, believes that bubbles facilitate the concentration of capital into emerging industries and innovative projects, enhancing the market's acceptance of high-risk early projects, thereby encouraging entrepreneurs and investors to take bold risks and innovate. Just as the 'internet bubble' of the 1990s left behind infrastructure, such as fiber optic networks and data centers, after its burst in 2000, laying the foundation for the internet+ era. Once the timeline of government spending (stimulus policies) under the Trump administration is clear, if government spending is relatively aggressive, the market liquidity excess may be seen as a 'bubble,' and the cryptocurrency market may also be driven by liquidity to let 'value chase price.'
It is also worth noting that the author has previously posited that Bitcoin acts as an amplifier for US stocks while also serving a hedging function against real-world risks. This places Bitcoin in a dilemma between liquidity and inflation hedging. Looking at consumer prices, from 2019 to 2024, the average price of milk in the US rose from about $2.58/gallon to $3.86/gallon, an increase of approximately 49.22%. During this period, Bitcoin's increase was about 1025%, while gold increased by about 73%, slightly exceeding the risk asset benchmark, the S&P 500 (about 40%).
Some countries have even chosen to invest in Bitcoin to protect their wealth from inflation erosion. For example, El Salvador and the Central African Republic have adopted Bitcoin as legal tender, and Bhutan is mining Bitcoin, attempting to leverage its scarcity and decentralization to counter inflation risks.
In the current macro environment, regardless of short-term fluctuations, Bitcoin's fixed supply of 21 million, its scarcity, decentralization, and global liquidity remain unchanged. The process of its transition to a store of value is being accelerated by institutions and publicly listed companies competing to allocate it. This financial experiment that began with cypherpunks will eventually find its footing in the real world.
