Original source: Wu said blockchain

The two most important words in the cryptocurrency industry are cycles. In this issue, we discussed the macro trend and cryptocurrency with Jiang Jinze, chairman of MuseLabs, a global asset allocation research institution and former chief researcher of Binance Research Institute in China. We discussed the impact of the Fed's interest rate hike and cut cycles on cryptocurrencies, the impact of Bitcoin spot ETFs on cryptocurrencies, the resonance between Bitcoin and Nasdaq, and the impact of the US election on cryptocurrencies. Jiang Jinze believes that from the perspective of interest rates, the possibility of the bull market continuing in the next year is still very high.

GPT is used to convert audio to text, which may contain errors. This podcast was conducted before the approval information of the Ethereum ETF was released, so the full interview and content do not take into account the possible impact of the approval of the ETH ETF.

Listen to the full podcast: Little Universe | YouTube

Nasdaq hits all-time high, is the cryptocurrency market resonating with Nasdaq?

Historically, the cryptocurrency market does have a correlation with the Nasdaq market, but this correlation is not always stable. The correlation depends on the choice of statistical period: the shorter the period, the greater the volatility, and the longer the period, the flatter the correlation. For example, choosing a 365-day period shows that the correlation between BTC and the Nasdaq 100 usually remains above 80%.

Judging from past trends, the cryptocurrency market is indeed highly correlated with the Nasdaq in certain periods, such as 2022, which remained highly correlated almost throughout the year until the end of the year due to the impact of events such as FTX. In early 2023, the correlation was restored until the banking crisis in March caused volatility again. The reaction of the cryptocurrency market is usually larger than that of the stock market. For example, during the banking crisis, it was regarded as an alternative to traditional banking, resulting in a short-term decline in correlation.

The impact of independent events on the cryptocurrency market is also significant. For example, events such as the Ethereum upgrade in June 2023 and the SEC's prosecution of a series of projects have panicked market sentiment, leading to a decline in correlation with US stocks. Last fall, the cryptocurrency market once again experienced an independent upward trend due to the expected adoption of spot ETFs, while U.S. stocks were in a period of correction.

In terms of the Fed's policy, the volatility of the cryptocurrency market is also closely related to interest rate changes. In early 2024, the U.S. stock market rebounded due to interest rate changes, but the cryptocurrency market reacted slightly slower. Overall, the cryptocurrency market may decouple in the short term under the influence of independent events, but it will still resonate with Nasdaq in the long term.

Therefore, the trend of the cryptocurrency market is affected by both its own application curve and macroeconomic policies. When there is no obvious independent growth theme in the market, its valuation tends to be inversely related to interest rates, that is, valuation is high when interest rates are low and low when interest rates are high. Analysis of the interest rate market can help predict the trend of the cryptocurrency market, but predictions based on correlation alone are not sufficient, and the macroeconomic and policy background behind it must also be considered.

The impact of the Fed's interest rate hike and cut cycle on cryptocurrencies and Nasdaq

In fact, the Fed's interest rate hike will indeed have a negative impact at the beginning, because the marginal change of the risk-free interest rate is the largest. For example, when the interest rate is raised from a low point, whether it is 50 basis points or 5 basis points, when the base is small, the marginal change is large. But as the number of interest rate hikes increases, the base becomes larger and the marginal impact becomes smaller. Therefore, after the interest rate hike is over, the market often rebounds and even enters a bull market stage.

In addition, the performance of U.S. stock companies has recovered very well, which is also an important reason for the market's rise. For example, when NVIDIA's stock price was $800 or $900, the PE multiple was even lower than before 2019. This illustrates that although the stock price has increased by 30% to 40%, the valuation has not expanded significantly. In fact, most stock price increases are driven by earnings, that is, the company's earnings growth matches the increase in stock prices.

Therefore, the rebound after the rate hike is not abnormal, but rather the result of the combined effect of reduced marginal changes and recovery in corporate performance.

Will artificial intelligence have a big impact on Nasdaq?

I think AI has little impact on Nasdaq. The stocks that AI has affected so far are those that can reflect performance, such as Nvidia. Microsoft only has investment but no income. In fact, from last year to now, even to today, the stocks that have been hyped in the US stock market are all because of AI making money. If there is no money, the price of AI may fall.

Investment in US stocks is also very cautious now, and there is no bubble in AI speculation. For example, after Meta announced that it would increase its computing power investment by 20%, its stock price immediately fell by more than 10%, because the market did not know when these investments would be profitable. The market is very realistic, unlike the concept speculation in the cryptocurrency circle. For example, Google is also a major player in AI, but its stock price also fell due to the poor growth of advertising revenue.

Overall, although the share price of US stocks is rising every day, the driving factor behind it is profit growth, not valuation bubble. Although the PE multiple of US stocks is now at a historical high, it is difficult to push it higher without a large amount of money being released or hype. In the future, if the application of AI does have a lot of room for imagination, there may be a hype bubble, such as pushing Nvidia's PE to more than 100 times, but the current market is still relatively rational.

Regarding the situation of the crypto market, I think its correlation with the Nasdaq is mainly because both are closely related to interest rates, not because they follow each other. In particular, cryptocurrencies are more sensitive to interest rates because they are not profitable and can only look at interest rates. Although a strong stock market is good for sentiment, it will not directly drive the crypto market to strengthen. The crypto market needs monetary policy and its own new themes to drive it. Only when these two conditions appear at the same time can it set a new record high. At present, the crypto market lacks an independent application cycle, which is why it is difficult for it to rise to a very high level in one go.

There is a high possibility of a bull market in the next year, and risk assets will strengthen after the suspension of interest rate hikes

After the interest rate hike is suspended, risk assets tend to strengthen. Historically, after the Fed suspends interest rate hikes, the economic cycle tends to enter a recession because the economy is either overheating or in recession. The interest rate hike is to deal with the overheating of the economy, which will then face a downturn or even recession, and then recovery, overheating again, and so on. After the interest rate hike is suspended, the economy may enter a recession. The Fed will cut interest rates when it sees that the economy is in recession, and may even enter a continuous interest rate cut channel. The initial interest rate cut is not a good thing, just like the initial interest rate hike, because the market has encountered problems.

The market is currently looking at economic data or employment data. If it gets worse, everyone will be happy and the market will rise, but if it gets too bad, everyone will worry about entering a recession and withdraw. Therefore, the data in the next period of time will be very critical.

From a macro-cyclical perspective, cryptocurrencies have multiple attributes and are actually pro-cyclical commodities. Taking PMI as an indicator of economic activity, cryptocurrencies are usually in a bull market during the PMI expansion period. If the current economic situation can be maintained and does not go down, it is the best situation. Because once the economic momentum goes down, it will enter a trend of getting lower and lower, causing panic.

If the current economic development momentum can maintain a GDP growth rate of about 2-3%, and the stock market rises to the current level, people may be a little hesitant and dare not continue to buy, because the valuation is already at a historically high level. Although there is no bubble, no one is willing to push it into a bubble state. On the contrary, it will start to fall if the performance is slightly worse. In this case, funds will look for other allocation targets, and there is more room for rushing to other assets. For example, the recent Hong Kong stock market has seen a large influx of foreign capital.

Ordinary investors are different from institutional investors. Institutional investors have new funds coming in every year and have enough patience to make arrangements. They can buy more as the price drops. But ordinary people may not save more money every year. If the funds are exhausted, they may sell at a loss at a low point. Therefore, there is a big gap between ordinary investors and institutions in terms of mentality.

What is the final size of the Bitcoin spot ETF? How high will Bitcoin rise at most?

I think it is credible that ETFs will eventually reach 1% of the U.S. AUM. Why did the Bitcoin ETF stop at over $50 billion? Because you can find a similar reference, such as the largest gold ETF, which is also over $50 billion. When the Bitcoin ETF reached the same size as the largest gold spot ETF within a month of listing, the market needed a break. The overall size of the gold ETF is several hundred billion. I don’t remember the exact number, but it is at least several hundred billion.

The goal of Bitcoin ETF is to gradually catch up with crude oil ETF, then catch up with the largest gold ETF, and then catch up with the total size of gold ETF. When Bitcoin ETF exceeds 50 billion, the market imagination will be opened up and move to the next stage. Next, we can find some data to estimate the inflow of incremental funds.

The total size of all open funds in the United States is more than 60 trillion, of which the potential allocation size is 9.7 trillion. If these funds allocate 1%, there will be an inflow of 97 billion US dollars, 5% allocation is 480 billion, and 10% allocation is 970 billion. But now there are only more than 50 billion, which is only the size of mutual funds in North America and Europe, not including non-listed asset management, which is larger but difficult to estimate.

Judging from the SEC's 13 F disclosure, the number of institutions holding BTC is increasing. In February, only a dozen funds held Bitcoin ETFs, but now there are more than 130 funds holding them, and most of them are private funds. These institutions also came to test the waters at the beginning, and the actual allocation scale is likely to exceed US$97 billion in the next year.

Another way to estimate is to use the total size of global asset management to calculate, taking a conservative allocation of 0.5% to 5% of incremental funds, and the corresponding BTC price ranges from 170,000 to 1.7 million US dollars. This explains why some people predict that Bitcoin can reach 200,000 or even 1 million US dollars. Assuming that the price of Bitcoin reaches 230,000 US dollars, its market value is about 4.7 trillion, which is not exaggerated compared with the market value of existing assets, but if it reaches 1 million US dollars, the valuation is very exaggerated. It may not be realistic in the short term, but in 10 years, if the asset markets on the right double, it is possible for Bitcoin to reach 1 million US dollars.

Currently, the market value of Bitcoin is comparable to that of silver, and it will take some events to boost its value to surpass silver on a large scale. Future development depends on the allocation ratio of incremental funds and the market's acceptance of Bitcoin.

US election: Will Trump's coming to power be good for cryptocurrencies?

I think that in the current relatively favorable macroeconomic environment, Bitcoin will not have a particularly large increase in the short term, and may fluctuate between 60,000 and 70,000. If the economy cools down steadily in the future and the Federal Reserve successfully starts to cut interest rates, Bitcoin will most likely rise to a range of 130,000 to 170,000 US dollars.

Of course, this requires a certain degree of dovishness from the Fed. For example, the market is now pricing in a 25 basis point rate cut in September and December, a total of 50 basis points. I think this rate cut is not enough to cause a significant rise in the market. The market may expect a more dovish situation to be more likely to reach the target of more than $100,000.

If the data in the next two months weaken further, but only to a limited extent, this may lead people to expect the first Fed rate cut to occur in July. If this happens, the confidence that the price of Bitcoin will reach $120,000 to $170,000 will be higher. But if there are only two or even less rate cuts this year, I think it will be difficult to reach this level this year. Therefore, the price of Bitcoin needs the cooperation of macroeconomics and monetary policy in many aspects to achieve a big rise.

In the long term, where will be the turning point of this bull-bear market? The bull market generally does not exceed two years?

Historically, bull markets usually end when economic conditions are not good. It is still difficult to predict when the global economic recession will occur. Last year, people predicted that there might be a hard landing at the beginning of this year, but in fact, the economy is developing very well. For example, the impact of the banking crisis and high interest rates on the real estate market was not as serious as everyone expected.

Generally speaking, the bull market of Bitcoin rarely lasts more than two years. If we count from the low point at the beginning of last year, this bull market has been going on for more than a year. There may be a deep adjustment by the end of this year or the beginning of next year. This is just a reference and is not very meaningful.

AI is a new variable in the economic cycle. If AI can really significantly improve production efficiency or create new demand, it may trigger a new round of investment and demand trends, affecting the judgment of the economic cycle. For example, Google's smart glasses envision that if AI is embedded in glasses and seamless cooperation is achieved, it will usher in a moment similar to the iPhone.

Another important factor is China's policies. After the epidemic was lifted, everyone expected China to have strong monetary easing or fiscal stimulus, but the rebound only lasted two months. This year, some policies have gradually taken effect, including the central bank's purchase of bonds and the government's direct purchase of buildings, which all indicate that China may release water and drive the market. Rising inflation expectations in China may also be beneficial to Bitcoin.

The risk in the future is that the debt burden of the United States is getting heavier. If the debt burden is too heavy, the yield in the secondary market may be difficult to fall, even if there is an expectation of interest rate cuts. Although the possibility of a debt crisis in the United States is small because the Federal Reserve can eventually buy bonds directly, the voice of a U.S. debt supply crisis may cause market shocks. For example, last fall, the U.S. Treasury yield rose to 5%, mainly due to the increase in U.S. Treasury issuance and inflation expectations.

Overall, the future trend of Bitcoin needs to be combined with multiple factors of macroeconomics and monetary policy.