Produced by | OKG Research
Author | Hedy Bi
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 retreating below $93,000, with a maximum drop of over 6%. This was triggered by rumors of a potential ceasefire agreement between Israel and Lebanon, causing market turbulence. Not only Bitcoin, but gold and oil prices also fell sharply in response.
Bitcoin's growth performance over the past month (40%+) has also amplified its investors' risk sensitivity. Is this 40% return just a beginning or an end? The author believes this is a short-term impact of a singular event; as long as external macro conditions remain unchanged, liquidity may not allow this cycle to come to an abrupt 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 cycle of 525 basis points of rate hikes. As Bobby Axelrod, a character from (Billions), said, 'Power is not everything, but without power you are nothing.' The Federal Reserve's impact on Bitcoin forces it to find a balance between liquidity surges and the demand to hedge against inflation. Bitcoin, serving as both a US stock magnifier and a tool to hedge against inflation, sees interest rate cuts releasing liquidity, injecting broader space for risk assets. Meanwhile, potential economic fluctuations and policy uncertainties make cryptocurrencies like Bitcoin a choice for 'hedging against real-world risks'.
Image Source: Christopher T. Saunders, SHOWTIME
As Trump resumes office and forms 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 during his campaign to establish a national Bitcoin reserve, using cryptocurrency to weaken the dollar's competitors. As Trump and his team consider appointing regulatory officials who are friendly to cryptocurrency, this also promotes the establishment of an international cryptocurrency regulatory framework led by the US.
However, there are also voices questioning the interest rate cuts, shouting that 'the financial crisis is coming'. According to MacroMicro's US recession index (probability), the likelihood of a US recession in November 2024 is 24.9%. Compared to the last economic recession triggered by a financial crisis, if this round leads to a recession cycle, the recession may peak within 6 months. In the game of liquidity and hedging against inflation, Bitcoin reflects more of its sensitivity to liquidity changes in this round of economic adjustments.
Image Source: MacroMicro
Institutions: Exceeding the 5% Key Threshold
Under such macroeconomic conditions, Bitcoin has also garnered favor from institutional liquidity. Since the opening of the Bitcoin spot ETF channel in January 2024, according to statistics from OKG Cloud Chain Research Institute on November 21, 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, under the US Securities and Exchange Commission (SEC) regulations, shareholders holding over 5% must report to the SEC.
Bitcoin Holding Distribution | Image Source: OKG Research, bitcointreasuries, public news
In addition to Bitcoin spot ETFs, publicly traded companies have also taken actions in this political environment. According to incomplete statistics from OKG Cloud Chain Research Institute, since November 6, 17 publicly traded companies in the US and Japan have announced or board-approved Bitcoin as a strategic asset. Among them, the most prominent, MicroStrategy, purchased 55,500 Bitcoins for $5.4 billion between November 18 and 24. Currently, only 0.01% of publicly traded companies hold Bitcoin, indicating that this is just the tip of the iceberg of institutional purchasing power, and the market is still in the 'elite experimental stage.'
OKG Cloud Chain Research Institute has conservatively estimated that approximately $2.28 trillion (Note 1) will enter Bitcoin within the next year, and this asset volume could push Bitcoin prices to around $200,000, consistent with predictions from Bernstein, BCA Research, and Standard Chartered Bank.
Estimated Institutional Fund Volume | Image Source: OKG Research (Note 1)
Bubble First, How to Hedge Against Milk Price Increases?
Liquidity benefits have been questioned by the market for being excessive due to a series of events, turning from the 'Trump Trade' into the 'Trump Bubble'. Tyler Cowen, the author of (The Great Stagnation), believes that bubbles facilitate the concentration of capital into emerging industries and innovation projects, increasing 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—that laid the foundation for the Internet+ era after its burst in 2000. After the timeline of government spending (stimulus economic policy) under the Trump administration is clarified, if government spending is relatively aggressive, the market liquidity surplus could be suspected of being a 'bubble', and the crypto market may also see 'value chasing prices' due to liquidity 'manipulation'.
It is also important to note that the author has previously proposed in the qualitative attributes of Bitcoin that Bitcoin serves as a magnifier for US stocks while also assuming the role of hedging against real-world risks, which causes Bitcoin to oscillate between liquidity and the game of hedging against inflation. To put it in terms of the prices that the public is most aware of, from 2019 to 2024, the average price of milk in the US has risen from about $2.58/gallon to $3.86/gallon, an increase of about 49.22%. During this period, Bitcoin has risen by about 1025%, gold has risen by about 73%, slightly exceeding the representative index of risk assets, the S&P 500 (about 40%).
Some countries have also chosen to invest in Bitcoin to protect wealth from the erosion of inflation. For instance, El Salvador and the Central African Republic have adopted Bitcoin as legal tender, and Bhutan is mining Bitcoin, attempting to leverage its scarcity and decentralized characteristics to fend off inflation risks.
In the current macro environment, regardless of short-term fluctuations, the fixed supply of 21 million Bitcoins, its scarcity, decentralization, and global liquidity remain unchanged. Its process of moving towards a value storage role is being accelerated by institutions and publicly traded companies vying to allocate it. This financial experiment that began with cypherpunks will ultimately find its footing in the real world.
Note 1: This fund volume estimation method:
a. Government funds and pension funds select countries and states currently allowing investment in Bitcoin, and choose 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 US, 4.22% for the UK, and an average of 3% for Nordic countries.
b. Publicly traded companies calculate strategic reserve funds based on cash assets in major global stock markets (the US, Germany, Japan, the UK, South Korea, Hong Kong, Singapore, India, Brazil, Australia, Canada, Taiwan) (market value multiplied by 5%, with Microsoft at 9.5%) and multiply by the growth factor (calculated at a 10-year global stock market CAGR of 9.68%) and then by the investment ratio of 10%.
c. Private companies calculate in sync based on the 90% weight disclosed for publicly traded companies. d. The wealth management industry estimates that 71% of high-net-worth individuals have already invested in Bitcoin, calculating the remaining investable wealth of high-net-worth individuals multiplied by a growth factor of 4.5% and then by an investment ratio of 5%.
*The content described in this article is merely market observation and trend analysis, and should not be regarded as specific investment advice.
