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 below $93,000, with a maximum decline of over 6%. This was triggered by rumors of a potential ceasefire agreement between Israel and Lebanon, causing market turbulence. Not only Bitcoin but also gold and oil prices fell sharply in response. Bitcoin's growth performance over the past month (40%+) has amplified the risk sensitivity of its investors; 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 rate hike cycle. As Bobby Axelrod said in billions, "Power isn't everything, but without power, you are nothing." The Federal Reserve's influence on Bitcoin leads it to seek a balance between excess liquidity and the need to hedge against inflation. Bitcoin serves as both a lever for US stocks and a tool for hedging against inflation; the interest rate cut releases liquidity, injecting broader space for risk assets. Potential economic fluctuations and policy uncertainties make cryptocurrencies like Bitcoin a choice for "hedging against real-world risks."

With Trump's return to power and the formation of a new team, the increase in government spending through the implementation of a series of fiscal stimulus policies will further drive market liquidity to ensure "America First." Moreover, Trump proposed during his campaign to establish a national Bitcoin reserve, using cryptocurrency to weaken the competition against the US dollar. As Trump and his team consider appointing regulatory officials who are friendly towards cryptocurrency, this also promotes the establishment of an international cryptocurrency regulatory framework dominated by the US.

However, there are also voices questioning the rate cuts and shouting "a financial crisis is imminent." According to MacroMicro's US recession index (likelihood), the probability of a recession in the US by November 2024 is 24.9%. Compared to the last economic recession triggered by a financial crisis, if this round is indeed a recession cycle, then the peak may occur within 6 months. In the game of liquidity and hedging against inflation, Bitcoin in this economic adjustment cycle reflects more sensitivity to changes in liquidity.

Institutions: Exceeded the 5% critical threshold

Under such macroeconomic conditions, Bitcoin has also gained favor from 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% holding percentage is often a critical threshold in the financial industry; for example, in the SEC's regulations, shareholders holding more than 5% are required to report to the SEC.

Besides Bitcoin spot ETFs, listed companies have also taken action in such a political environment. According to incomplete statistics from the OKLink Research Institute, since November 6, 17 US and Japanese listed companies have announced holding or board approval to use Bitcoin as a reserve 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 institutional purchasing power, and the market is still in the "elite experimental stage."

According to conservative estimates from the OKLink Research Institute, the statistically measurable funds entering Bitcoin over the next year are approximately $2.28 trillion (Note 1). This asset volume could push Bitcoin's price up to around $200,000, consistent with predictions from Bernstein, BCA Research, and Standard Chartered Bank's financial institutions.

Bubbles come first, how to hedge against rising milk prices?

The liquidity benefits, buoyed by a series of events, are also being questioned by the market as potentially excessive, transforming from the "Trump trade" to the "Trump bubble." Tyler Cowen, author of The Great Stagnation, believes that bubbles facilitate the concentration of capital into emerging industries and innovative projects, which will enhance the market's acceptance of high-risk early-stage 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 groundwork for the Internet+ era after its burst in 2000. After the timeline for government spending under the Trump administration (stimulus economic policies) is clarified, if government spending is relatively aggressive, excess market liquidity may raise concerns of a "bubble," and the crypto market may also see liquidity "drive up prices," leading to "value chasing price."

It is also worth noting that I have previously suggested in the qualitative assessment of Bitcoin that it serves as both a lever for US stocks and a function of hedging real-world risks, which causes Bitcoin to oscillate between liquidity and inflation hedging. In terms of the most perceived consumer prices, from 2019 to 2024, the average price of milk in the US 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 increased by about 73%, slightly exceeding the risk asset representative index, 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 is mining Bitcoin, attempting to leverage its scarcity and decentralized characteristics to withstand inflation risk.

In the current macro environment, regardless of short-term volatility, Bitcoin's fixed supply of 21 million coins, decentralization, and global liquidity remain unchanged. Its journey towards a value storage role is being accelerated by institutional and publicly listed companies competing to allocate resources. This financial experiment that began with cypherpunks will ultimately find its foothold in the real world.#BTC☀