Produced by | OKG Research
Author | Hedy Bi
This Tuesday, the reversal trend of the overnight 'Trump trades' affected the Bitcoin market. The price of Bitcoin once surged to about $99,000 before quickly falling back below $93,000, with a maximum drop of over 6%. This was due to rumors that Israel and Lebanon are likely to reach a ceasefire agreement, shaking the market. Not only Bitcoin, but gold and oil prices also fell sharply in response.
The recent growth performance of Bitcoin (over 40%) has also amplified its investors' risk sensitivity. Is this 40% return a beginning or an end? I believe this is a short-term impact of a single event; if external macro conditions remain unchanged in the long term, liquidity may not allow this cycle to come to a sudden halt.
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 525 basis point tightening cycle. As Bobby Axelrod said, "Power is not everything, but without power you are nothing." The Federal Reserve's influence on Bitcoin has led it to seek a balance between oversupply of liquidity and demand for inflation hedging. Bitcoin, as both a magnifier of U.S. stocks and a tool for hedging inflation, sees interest rate cuts release liquidity, injecting broader space for risk assets. Meanwhile, potential economic fluctuations and policy uncertainties make cryptocurrencies like Bitcoin a choice for "hedging real-world risks."
Image Source: Christopher T. Saunders, SHOWTIME
As Trump returns to power and forms a new team, a series of fiscal stimulus policies will be implemented to ensure 'America First', and the increase in government spending will further boost market liquidity. Moreover, during his campaign, Trump proposed a plan to establish a national Bitcoin reserve to weaken the dollar's competitors using cryptocurrency. With Trump and his team considering appointing regulatory officials friendly to cryptocurrencies, this also promotes the establishment of an internationally dominant cryptocurrency regulatory framework led by the U.S.
However, there are also voices questioning the rate cuts and shouting that 'the financial crisis is imminent'. According to MacroMicro's U.S. recession index (probability), the likelihood of a recession in the U.S. in November 2024 is 24.9%. Compared to the last economic recession caused by the financial crisis, if this round is a recession cycle, the recession could peak within 6 months. In the game of liquidity and inflation hedging, Bitcoin in this round of economic adjustment reflects more its sensitivity to changes in liquidity.
Image Source: MacroMicro
Institutions: Exceeded the critical threshold of 5%
Under such macroeconomic conditions, Bitcoin has also attracted institutional liquidity. Since the opening of the Bitcoin spot ETF channel in January 2024, according to statistics from OKG Research Institute on November 21, the global Bitcoin spot ETFs have accounted for 5.63% of the total Bitcoin supply. A 5% holding ratio is typically a key threshold in the financial industry; for example, in the SEC regulations, shareholders holding more than 5% must report to the SEC.
Bitcoin Holding Distribution | Image Source: OKG Research, bitcointreasuries, public news
In addition to Bitcoin spot ETFs, publicly listed companies have also taken action in such a political environment. According to incomplete statistics from OKG Research Institute, since November 6, 17 U.S. and Japanese publicly listed companies have announced holding or board approval to use Bitcoin as a strategic reserve asset. Among them, the most prominent is MicroStrategy, which purchased 55,500 Bitcoins for $5.4 billion from November 18 to 24. Currently, only 0.01% of publicly listed companies globally hold Bitcoin, meaning this is just the tip of the iceberg of institutional purchasing power, and the market remains in the 'elite experimental stage'.
OKG Research Institute conservatively estimates that the statistical funds entering Bitcoin in the next year will be about $2.28 trillion (Note 1), which could push Bitcoin prices up to around $200,000, consistent with predictions from Bernstein, BCA Research, and Standard Chartered Bank.
Estimated funds to be invested by institutions | Image Source: OKG Research (Note 1)
Bubble precedes, how to hedge against rising milk prices?
The liquidity benefits have been questioned by the market as to whether they are excessive, transforming from 'Trump trades' to 'Trump bubbles'. Tyler Cowen, author of The Great Stagnation, believes that bubbles facilitate capital concentration into emerging industries and innovative projects, enhancing the market's acceptance of high-risk early projects, thus encouraging entrepreneurs and investors to take bold risks and innovate. Just as the 'internet bubble' of the 1990s left behind infrastructure—fiber optic networks and data center construction—laying the foundation for the internet+ era. Once the timeline for government spending (economic stimulus policy) under the Trump administration is clarified, if government spending is aggressive, market liquidity may be suspected of having a 'bubble', and the crypto market will also allow 'value to chase price' due to liquidity 'inflation'.
Moreover, it is worth noting that in my qualitative assessment of Bitcoin's assets, I have proposed that Bitcoin is both a magnifier of U.S. stocks and a hedge against real-world risks, causing Bitcoin to oscillate between liquidity and inflation hedging. Taking the most perceived consumer prices, from 2019 to 2024, the average price of milk in the U.S. has increased from about $2.58/gallon to $3.86/gallon, a rise of about 49.22%. During this period, Bitcoin has risen approximately 1025%, gold has risen about 73%, slightly exceeding the representative index of risk assets in U.S. stocks, the S&P 500 (about 40%).
Even some countries have chosen to invest in Bitcoin to protect wealth from inflation erosion. For example, El Salvador and the Central African Republic have adopted Bitcoin as legal tender, while Bhutan mines Bitcoin, attempting to leverage its scarcity and decentralization characteristics to resist inflation risks.
In the current macro environment, regardless of short-term volatility, the fixed supply of 21 million Bitcoins, decentralization, and global liquidity remain unchanged. Its transition to a value storage role is being accelerated by institutions and publicly listed companies competing to allocate. This financial experiment that began with the cypherpunks will eventually find its foothold in the real world.
Note 1: The method of calculating this fund amount:
a. Government funds and pension funds select countries and regions that currently allow investment in Bitcoin, choosing 2% as the investment ratio, along with different CAGR for each country and region as the growth rate for the next year, for example, 8.9% for the U.S., 4.22% for the U.K., and an average of 3% for Nordic countries.
b. Publicly listed companies calculate strategic reserve funds based on cash assets in major global stock markets (U.S., Germany, Japan, U.K., South Korea, Hong Kong, Singapore, India, Brazil, Australia, Canada, Taiwan) (market value multiplied by 5%, Microsoft's ratio is 9.5%) and multiply by a growth factor (calculated as the global stock market CAGR over the past decade is 9.68%) and then multiply by an investment ratio of 10% for estimation.
c. Private companies calculate synchronously based on the current disclosed proportion of 90% for publicly listed companies. d. The wealth management industry, based on surveys from Morgan Stanley, Capgemini, Accenture, etc., indicates that 71% of high-net-worth individuals have already invested in Bitcoin, selecting the remaining high-net-worth individuals' wealth scale to multiply by a growth factor of 4.5% and then by an investment ratio of 5% for estimation.
*The contents described in this article are for market observation and trend analysis only and should not be regarded as specific investment advice.
