Author: Hedy Bi, OKG Research
This Tuesday, the reversal trend of the overnight 'Trump trade' affected the Bitcoin market. Bitcoin's price briefly surged to about $99,000 before quickly falling back below $93,000, with a maximum drop of over 6%. This was due to rumors of a potential ceasefire agreement between Israel and Lebanon, causing market turbulence. Not only Bitcoin, but gold and oil prices also plummeted significantly.
Bitcoin's growth performance in the past month (over 40%) has also amplified its investors' risk sensitivity. Is this 40% gain a beginning or an end? The author believes this is a short-term impact of a single-point event; if external macro conditions remain unchanged, liquidity may not allow this cycle to abruptly stop.
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 (from Billions) said, 'Power is not everything, but without power, you are nothing.' The Federal Reserve's impact on Bitcoin has led Bitcoin to seek a balance between excessive liquidity and the need to hedge inflation. As a tool that serves both as a U.S. stock amplifier and an inflation hedge, the interest rate cut releases liquidity, injecting broader space for risky 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
With Trump returning to power and forming a new team, implementing a series of fiscal stimulus policies to ensure 'America First,' the increase in government spending will further boost market liquidity. Moreover, Trump proposed a plan during his campaign to establish a national Bitcoin reserve, using cryptocurrency to undermine the dollar's competitors. As Trump and his team consider appointing regulators who are friendly towards cryptocurrencies, this also drives the establishment of an internationally dominant cryptocurrency regulatory framework led by the U.S.
However, there are also voices questioning interest rate cuts and shouting that a financial crisis is imminent. According to MacroMicro's U.S. recession index (probability), the likelihood of a U.S. recession in November 2024 is 24.9%. Compared to the last economic recession triggered by the financial crisis, if this round were a recession cycle, the recession might peak within six months. In the game of liquidity and inflation hedging, Bitcoin in this economic adjustment more reflects its sensitivity to changes in liquidity.
Image source: MacroMicro
Institutions: Exceeded the critical threshold of 5%
Under such macroeconomic conditions, Bitcoin has also gained favor from institutional liquidity. Since the Bitcoin spot ETF channel opened in January 2024, according to the statistics from OKG Cloud Chain Research Institute on November 21, global Bitcoin spot ETFs have accounted for 5.63% of the total Bitcoin supply. A 5% shareholding ratio is usually a critical threshold in the financial industry; for example, in the regulations set by the U.S. Securities and Exchange Commission (SEC), 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, listed companies have also taken action in this political environment. According to incomplete statistics from OKG Cloud Chain Research Institute, since November 6, 17 U.S. and Japanese listed companies have announced that they hold or have board approval to use 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 listed companies globally hold Bitcoin, indicating that this is just the tip of the iceberg of large institutional purchasing power, and the market is still in the 'elite experimental stage.'
According to conservative estimates by OKG Cloud Chain Research Institute, the statistically available funds entering Bitcoin in the next year are approximately $2.28 trillion (Note 1), and this amount of assets could push Bitcoin's price to around $200,000, consistent with predictions from Bernstein, BCA Research, and Standard Chartered Bank.
Estimated institutional funds to be invested｜Image source: OKG Research (Note 1)
Bubble precedes, how to hedge against rising milk prices?
The liquidity benefits, propelled by one event after another, have also led the market to question whether it is excessive, transforming from 'Trump trade' to 'Trump bubble.' Tyler Cowen, author of The Great Stagnation, believes that bubbles facilitate the concentration of capital into emerging industries and innovative projects, increasing market 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—fiber optic networks and data center construction—that laid the foundation for the internet era after its burst in 2000. Once the timeline of government spending (stimulus economic policy) is clarified under the Trump administration, if government spending is relatively aggressive, market liquidity may be suspected of being 'bubbly,' and the crypto market may also experience a 'boost' from liquidity, leading to 'value chasing price.'
It is also important to note that the author previously stated that Bitcoin serves both as an amplifier for U.S. stocks and as a hedge against real-world risks, which makes Bitcoin oscillate between liquidity and inflation hedging. In terms of the prices most perceived by the public, from 2019 to 2024, the average price of milk in the U.S. rose from about $2.58 per gallon to $3.86 per gallon, an increase of about 49.22%. During this period, Bitcoin increased by about 1025%, gold increased by about 73%, slightly exceeding the representative index of risky assets, the S&P 500 (approximately 40%).
Even some countries have 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, while Bhutan is mining Bitcoin, attempting to leverage its scarcity and decentralization to resist inflation risks.
In the current macro environment, regardless of short-term fluctuations, Bitcoin's fixed supply of 21 million coins, decentralization, and global liquidity remain unchanged. Its transition towards a value storage role is being accelerated by the competition among institutions and listed companies to allocate. This financial experiment that began with cypherpunks will ultimately find its footing in the real world.
