Written by: Hedy Bi
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 exceeding 6%. This was triggered by rumors of a potential ceasefire agreement between Israel and Lebanon that shook the market. Not only Bitcoin, but gold and oil prices also plummeted significantly.
Due to the growth performance of Bitcoin in the past month (over 40%), its investors' risk sensitivity has also been amplified. Is this 40% yield a beginning or an end? I believe this is a short-term impact of a single event, as long-term external macro conditions remain unchanged, liquidity may not allow this cycle to abruptly end.
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 rate hike cycle. As Bobby Axelrod said in (Billions), '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 liquidity excess and hedging inflation demand. Bitcoin serves as both an amplifier for U.S. stocks and a tool to hedge against inflation; the interest rate cut releases liquidity, injecting broader space for risk assets. Meanwhile, potential economic volatility and policy uncertainty have made cryptocurrencies like Bitcoin a choice for 'hedging real-world risks.'
Image source: Christopher T. Saunders, SHOWTIME
With Trump back in power and forming a new team, a series of fiscal stimulus policies will be implemented to ensure 'America First,' and increased government spending will further drive market liquidity. Furthermore, during his campaign, Trump proposed a plan to establish a national Bitcoin reserve to weaken the dollar's competitors through cryptocurrency. As Trump and his team consider appointing regulatory officials friendly to cryptocurrency, this also promotes the establishment of a U.S.-led international cryptocurrency regulatory framework.
However, there are also voices questioning the interest rate cut and shouting 'a financial crisis is imminent.' According to MacroMicro's U.S. recession index (likelihood), the probability of a U.S. recession in November 2024 is 24.9%. Compared to the last economic recession triggered by a 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 round of economic adjustment reflects more of its sensitivity to changes in liquidity.
Image source: MacroMicro
Institutions: Have exceeded the 5% critical threshold
Under such macroeconomic conditions, Bitcoin has also gained favor among institutional liquidity. Since the Bitcoin spot ETF channel opened in January 2024, according to statistics from the OKLink Research Institute on November 21, global Bitcoin spot ETFs have accounted for 5.63% of the total Bitcoin supply. A 5% shareholding is typically a critical threshold in the financial industry; for example, under U.S. Securities and Exchange Commission (SEC) regulations, shareholders owning 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 this political environment. According to incomplete statistics from the OKLink Research Institute, since November 6, 17 publicly listed companies in the U.S. and Japan have announced holdings or board approvals to use Bitcoin as a strategic asset. Among them, the most notable is MicroStrategy, which purchased 55,500 Bitcoins for $5.4 billion between November 18 and 24. Currently, only 0.01% of publicly listed companies hold Bitcoin, indicating that this is just the tip of the iceberg for large institutional purchasing power, and the market is still in the 'elite experimental stage.'
The OKLink Research Institute conservatively estimates that the statistical funds entering Bitcoin within the next year will be approximately $2.28 trillion (Note 1), and this asset volume 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)
Bubbles precede, how to hedge against rising milk prices?
The positive liquidity, aided by a series of events, has also led the market to question whether it is excessive, transforming from the 'Trump trade' into 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 boldly take risks and innovate. Just like the 'Internet bubble' of the 1990s left behind infrastructure—fiber networks and data center construction—after its burst in 2000, laying the foundation for the Internet + era. After the timeline for government spending (stimulus economic policy) during Trump's administration is clarified, if government spending is aggressive, the market liquidity excess could be seen as a 'bubble,' and the cryptocurrency market may also experience 'inflated' liquidity, leading to 'value chasing price.'
It is also worth noting that in my qualitative assessment of Bitcoin, I once suggested that Bitcoin serves as both an amplifier for U.S. stocks and fulfills the function of hedging real-world risks, which causes Bitcoin to oscillate between liquidity and inflation hedging. Regarding 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's increase was approximately 1025%, while gold's increase was around 73%, slightly exceeding the risk asset representative index, the S&P 500 (around 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, and Bhutan is mining Bitcoin, attempting to use its scarcity and decentralized characteristics to resist inflation risks.
In the current macro environment, regardless of short-term fluctuations, the fixed scarcity of 21 million Bitcoins, decentralization, and global liquidity remain unchanged. The process of transitioning to a value storage role is being accelerated by institutions and publicly listed companies competing to allocate. This financial experiment that began with cypherpunks will ultimately find its foothold in the real world.
