Source: Uweb
The interest rate cut is coming. Will the market take off? The following is the highlights of the interaction between Uweb President Yu Jianing and EMC Labs Co-Founder Shang Silin. Enjoy:
1. The market generally expects the Federal Reserve to cut interest rates in September, and the focus is on the extent of the rate cut; the decline of Bitcoin reflects the market's concerns about the US economic recession
The September rate cut is almost a done deal. As early as the July Fed meeting, some members were inclined to cut rates, but they finally made a trade-off. At present, the market generally believes that the probability of a rate cut in September is very high. The focus of discussion is mainly on whether the rate cut will be 25 basis points or 50 basis points. Although there are very few voices that believe that the rate cut may be 75 basis points, this possibility is low. Since the last rate hike in July last year, the United States has experienced the highest interest rate environment in the past 25 years, which has lasted for more than a year. As to whether the US economy is on the eve of a recession, the market is also seeing more and more clear signs. Recent news also shows that major US institutions have revised non-farm payrolls data, with a downward adjustment of between 500,000 and 1 million. This revision further supports the expectation of a rate cut in September. The recent sharp drop in Bitcoin is related to the market's concerns about a recession in the United States. Although there have been some adjustments since then, the impact of hurricanes in Texas in June has also made the employment data look slightly more optimistic.
2. The interest rate cut is aimed at preventing recession. The relationship between Bitcoin price and interest rate is complex, and supply and demand are the key factors affecting the price.
A rate cut could trigger a bull market, and the main purpose of a rate cut is to prevent an economic recession. If an economic recession occurs, the Federal Reserve, the Democratic Party, and the Republican Party will all face tremendous pressure.
Before 2022, there was no clear correlation between Bitcoin’s price movement and changes in interest rates. Bitcoin’s performance has defied convention many times in past interest rate hikes and cuts. For example, the Fed began a three-year interest rate hike cycle in 2015, during which Bitcoin experienced a huge increase from a few hundred dollars to nearly $20,000. The August 2019 rate cut was similar, with Bitcoin already falling a few months before the rate cut, and eventually plummeting by more than 50% in the “312” incident in March 2020.
The 2023 example shows that Bitcoin has completed its rise in the high interest rate environment in the United States. From January to July 2023, despite the Fed's continued interest rate hikes, the price of Bitcoin rose from $16,000 to $30,000. After the interest rate hike stopped in July, Bitcoin soared again in the following months.
Before Bitcoin reached a market value of $1 trillion, its penetration in the mainstream market and its linkage with mainstream institutional strategies were relatively weak, especially before 2017. At that time, Bitcoin's market value was only a few hundred billion dollars, far from the scale of the top companies on Nasdaq. As the market value grows, especially after the ETF was passed in January this year, the number of Bitcoins held and the flow of funds have a greater impact on the BTC price. At present, the correlation between the US interest rate policy and Bitcoin is gradually increasing.
From these historical data, we can draw a conclusion: Bitcoin's price is more affected by supply and demand. Bitcoin may also experience net capital inflows in a high-interest rate environment, and net capital outflows in a low-interest rate environment. When predicting Bitcoin's price trend, we need to pay attention to supply and demand rather than relying solely on interest rate changes.
3. Funds gradually flow into the market, and monitoring the flow of stablecoins and ETFs is key
At the beginning of the year, the market had strong expectations for interest rate cuts, and some sensitive funds had already withdrawn from US stocks and US bonds in advance to look for new asset allocation opportunities. At the same time, the approval of US ETFs also attracted some institutional funds to enter the market in advance. However, different types of funds have different reaction times to interest rate cuts. For example, pension insurance funds tend to hold fixed-income assets until interest rates fall to a lower level, and such funds are usually the last to withdraw. Some funds invested in US stocks chose to withdraw their funds six months or earlier when they foresaw that interest rate cuts might trigger a sell-off in high-tech stocks. This flow of funds occurs gradually, and different types of funds will gradually enter the market.
ETF fund flows also reflect this trend. In the first quarter of this year, hedge funds were among the first institutions to enter the market through ETFs. However, by the second quarter, more large asset management institutions, long-term investors, and pension insurance funds also gradually entered the market. Since many institutions in the United States can only enter the Bitcoin market through ETFs, this gradual flow of funds reflects the nature of funds and cautious observation of new compliant products: institutions need an observation period of at least 90 trading days before deciding whether to promote these ETF products to customers.
The extent of the rate cut determines the speed at which different types of funds are squeezed out. If the US interest rate falls to a long-term low (for example, below 2%), more funds will gradually flow into the market. In addition, unlike the previous cycle, spot ETFs provide a direct tool for institutions to invest in Bitcoin, but this also requires a certain adaptation process.
The inflow of funds in the market can be monitored through two main channels. The first is to look at the stablecoin channel, the minting and destruction of USDT and USDC. These data are all public, and observe the detailed flow of these funds, including the amount of funds entering the exchange, the pledge situation in the DEX, etc. In addition, the flow of funds and institutional holdings of ETFs are also very important, especially the changes in holdings of different types of institutions, which are particularly critical for judging the medium- and long-term market trends.
The market changed hands actively from July to August, USDC inflows increased significantly, Coinbase Bitcoin continued to have net outflows, and US capital flows were obvious
There was a lot of turnover in the market between July and August, especially a lot of funds trying to buy at the bottom. However, the source of these new funds is still unclear.
While USDC has seen relatively small inflows at around $2 billion compared to USDT during this period, the increase this time is significant compared to previous inflows. This shows that USDC performed stronger than before in July and August, especially in the European and American markets. The users of USDC are mainly institutional funds in Europe and the United States. Therefore, this wave of capital inflows can be seen as an increase from the US market, although overall the main share of US dollar stablecoins is still occupied by USDT.
Judging from the flow of chips on Coinbase, the net outflow of Bitcoin from Coinbase has continued to lead other exchanges this year. For example, in a certain week, Coinbase may have a net outflow of 20,000 Bitcoins, of which more than 10,000 are from the platform. Through these data, it can be inferred that American investors have continued to carry out net outflow operations in this round of market fluctuations, and their net accumulation of funds is relatively clear.
5. After the market cleared, risks were significantly reduced, laying the foundation for future mid- to long-term gains.
After Bitcoin’s latest plunge to around $49,000, leverage levels in the market dropped significantly. The leverage of miners is particularly obvious. This leverage mainly comes from the legal currency costs that miners must bear during operations, including electricity fees, mine deposits and loan interest. When Bitcoin prices fluctuate, these rigid expenditures put tremendous pressure on miners. Especially when the price of Bitcoin gradually falls from its high point to 66,000, some miners have begun to clear their inventories and sell their Bitcoins to cope with these expenses. Miners have played an important role in this market correction, especially after Bitcoin’s hash rate dropped significantly. Data shows that the computing power dropped by more than 30% in July and August, reaching close to 200 EH/s. During this period, many miners were forced to close their mines or replace them with more efficient mining machines because they could not withstand the pressure. However, recent data shows that computing power has begun to recover, and miners have begun to sell less Bitcoin and gradually accumulate new inventories.
The movements of miners usually indicate important turning points in the market, as their tolerance is usually higher than that of other market participants. When miners are forced to "surrender", it means that the market has experienced a wave of large selling pressure, and other short-term speculators have also mostly left the market. Short-term operators have suffered heavy losses in the market adjustment from 7.37 to now. As the degree of loss deepens, most investors who remain in the market are those with strong tolerance, so the leverage of short-term speculators has basically been cleared.
Judging from the pledge rate and lending rate in the DeFi market, the current interest rate level is at the low point during last year's bear market. The lending rates of USDC and USDT on Aave and Compound are basically below 5%. This is in sharp contrast to the lending rates that exceeded 10% during the Bitcoin recovery period last year. The recent long-short ratio is close to 1:1, and market sentiment tends to be balanced. In some cases, shorts even need to pay fees to longs. This situation is extremely rare in the cycle, and it also indirectly reflects that the leverage ratio has dropped to a low level.
6. Bitcoin halving has far-reaching impacts, with market supply reduced by more than 20%. Halving is not only a driving force for short-term price fluctuations, but more importantly, its long-term impact
Market sentiment has been generally low recently. Although the topic of Bitcoin's fourth halving seems to have passed, the impact of halving is still huge. Looking back at historical data: the market experienced a big bull run within 18 months after the first three halvings. Although emotions and expectations played a role, the more direct reason was the reduction in supply.
This halving means that the annual output of Bitcoin will be reduced by 164,000, which is equivalent to the number of Bitcoins involved in the Mentougou incident. Compared with the previous cycle, the market supply will decrease by more than 20% in these four years, which is a very huge impact. And this is just the change on the supply side. In addition, the number of long-term Bitcoin holders has increased by at least 15% compared with the previous cycle, while the number of Bitcoins in exchanges has decreased by more than 10%. These factors combined mean that the actual impact may be greater than we think.
The effective supply of Bitcoin on the market, especially on exchanges, is the decisive factor affecting short-term prices. Currently, there are approximately 3 million+ Bitcoins on exchanges, which means that the market supply will be reduced by more than 20% after the halving, which is a significant amount. The impact of the halving is not just a one-time event, it is a cumulative process, with the supply of Bitcoin decreasing every ten minutes.
7. Bitcoin ETF has a long-term impact on the market. Although the inflow of funds is lower than expected, the participation of institutions has increased. The liquidity and pricing power of the current Bitcoin market may gradually tilt towards the US ETF.
The ETF sparked a great deal of optimism in the early days of its adoption, and many expected its impact on the market to be significant. As time goes by, the role of ETFs gradually becomes routine, and the market’s understanding of its impact becomes more rational.
First, the launch of ETFs truly incorporated Bitcoin into the mainstream stock trading market in the United States, including platforms such as Nasdaq, CME and NYSE, allowing all U.S. investors and institutions to allocate Bitcoin. However, the market's initial expectations for ETFs were too optimistic, especially after the first batch of 13F documents were disclosed, and it was found that hedge funds were the first to enter the market. While buying ETFs, these funds shorted Bitcoin futures through CME, causing the direct impact on the market to be greatly offset. Although the initial capital inflow was not small, close to US$10 billion, the market reaction was still not as strong as expected.
So far, the total inflow of ETFs is $17.1 billion, with a net inflow of about 290,000 bitcoins. Compared with the previous round of Grayscale Funds, which absorbed 650,000 bitcoins in just eight months in 2020, the performance of the 11 ETFs in this round is slightly inferior. Despite the participation of giants such as BlackRock, the amount of funds and bitcoin inflows are still slightly lower than expected.
In the long term, as more long-term investors and conservative funds gradually enter the market, the impact of ETFs will be more significant. Currently, more than 1,900 institutions hold Bitcoin ETFs, with each institution holding about 100 Bitcoins on average. Although the absolute number is small, its penetration rate is gradually increasing.
These institutions usually do not move too quickly, and many institutions require a 90-day observation period to gradually incorporate Bitcoin ETFs into their compliance systems. Therefore, in the medium and long term in the future, with the participation of more institutions, the liquidity and pricing power of this round of Bitcoin market may gradually tilt towards U.S. ETFs. The current average purchase cost of a Bitcoin ETF is about $58,000. As the number of Bitcoins held by the ETF exceeds 1 million or even 2 million, its pricing power on the market will become more significant. Although current capital inflows are less than expected, in the medium to long term, ETFs will continue to have an important impact on the market, especially on the transfer of Bitcoin pricing power in the future.
The introduction of ETFs has had a significant distortion and impact on Bitcoin on-chain data, particularly in terms of long-term investor holdings reductions. Although on the surface 900,000 Bitcoins were reduced, after excluding the more than 600,000 Bitcoins organized by Grayscale, the actual reduction was only about 300,000. This amount of reduction is well below the levels commonly seen in previous bull markets. In comparison, the reduction in holdings in the previous bull market reached 1.6 million to 1.7 million coins, and in the previous round it exceeded 2 million coins. This is also an important basis for us to judge that this bull market has not yet ended.
8. Regardless of the change of political parties, the regulation of cryptocurrencies in the United States has become stricter. The core of the cryptocurrency industry still lies in whether there is actual development and whether the penetration rate of BTC is increasing.
Trump's support for cryptocurrencies has been actually reflected in Republican-led states: most cryptocurrency mines are located in Republican-led states; the FIT-21 Act passed under the leadership of the Republicans provides a clearer framework for the regulation of cryptocurrencies, which also reflects Trump and his team's real support for cryptocurrencies.
Although the Democratic Party is relatively strict in regulation, the institutional checks and balances in the United States still allow institutions like Grayscale to promote the passage of ETFs. In other words, although the regulatory environment in the United States is strict, there is still room for flexibility and compromise.
Overall, whether Trump comes to power or the Democrats continue to govern, the US has raised its regulatory bottom line for cryptocurrencies. Even if external factors have a huge impact in the future, the core still lies in the actual development of the cryptocurrency industry and the increase in the penetration and influence of Bitcoin.
9. Amid global financial turmoil, marginal countries tend to adopt Bitcoin to avoid risks in the traditional financial system
Russia was kicked out of the SWIFT system, which was the first time that a global financial organization was used as a tool, marking a huge change in the world order. In the next two or three decades, the global financial system, including the system centered on the US dollar, may be regarded by some countries as no longer credible. In this context, Bitcoin, as a super-sovereign value reserve, will be increasingly adopted by marginal countries.
Not only El Salvador, but also Middle Eastern countries such as the UAE, Saudi Arabia, Iran, and some small countries in Asia such as Bhutan have begun to purchase Bitcoin or mine Bitcoin through state actions. Russia also circumvents the dollar blockade through Bitcoin mining. As global financial turmoil intensifies, more and more marginal countries will gradually increase the adoption of Bitcoin. This trend will continue to grow. Even if the United States takes the lead in Bitcoin reserves, it will become a landmark event and further promote this trend.
10. A new round of bull market requires more capital inflows. The movement of long-term holders is the key. The market top is difficult to predict.
To trigger a new round of bull market, at least 20 to 30 billion US dollars of capital inflows are needed. At present, the net inflow of stablecoins and ETFs has just exceeded the level of the previous round of stablecoins, but this is obviously not enough. The profitability of the chain also needs to be closely monitored, especially the chip movements of long-term holders. Currently, long-term holders have accumulated chips again after the first wave of selling, and their average cost is about 20,000 US dollars. When they start to sell chips on a large scale, they may be close to the top of the market. However, it is very difficult to judge the position of the market top, and it is difficult to accurately predict it based on historical cycles alone. Judging the top of this round of the market will be a real touchstone and extremely difficult.
