The two most important words in the cryptocurrency industry are cycles. In this issue, we discussed macro trends and cryptocurrency with Jiang Jinze, chairman of MuseLabs, a global major asset allocation research institution and former chief researcher of Binance Research China. We discussed the impact of the Fed's interest rate hike and cut cycles on cryptocurrencies, the impact of Bitcoin spot ETFs on cryptocurrencies, the resonance of Bitcoin and Nasdaq, the impact of the US election on cryptocurrencies, etc. Jiang Jinze believes that from the perspective of interest rates, the possibility of maintaining the bull market in the next year is still very high.
The audio-to-text conversion uses GPT and may contain errors. This podcast was conducted before the approval of the Ethereum ETF, so the full interview and content do not take into account the possible impact of the passage of the $ETH ETF.
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Nasdaq All-Time Highs, Does Cryptocurrency Market Resonate with Nasdaq?
Historically, correlations between the cryptocurrency market and the Nasdaq market do exist, but this correlation is not always stable. The correlation depends on the choice of statistical period: the shorter the period, the greater the fluctuations, and the longer the period, the flatter the correlation. For example, choosing a 365-day period would see Bitcoin’s correlation with the Nasdaq 100 typically remain above 80%.
Judging from past trends, the cryptocurrency market was indeed highly correlated with Nasdaq in certain periods, such as maintaining a high correlation for almost all of 2022 until decoupling at the end of the year due to the impact of events such as FTX. Correlations returned in early 2023 until the banking crisis in March caused volatility again. Cryptocurrency markets often react more strongly than equities, such as during banking crises and are seen as alternatives to traditional banking, leading to temporary declines in correlation.
The impact of independent events on the cryptocurrency market is also significant. For example, events such as the Ethereum upgrade in June 2023 and the SEC's prosecution of a series of cases have panicked market sentiment, leading to a decline in correlation with US stocks. Cryptocurrency markets were once again on a standalone uptrend last fall as expectations for spot ETFs came to pass, while U.S. stocks were in a correction period.
In terms of Fed policy, cryptocurrency market volatility is also closely tied to changes in interest rates. In early 2024, U.S. stocks rebounded due to changes in interest rates, while the cryptocurrency market was slightly slower to react. Overall, the cryptocurrency market may decouple in the short term under the influence of independent events, but it still resonates with Nasdaq in the long term.
Therefore, the trend of the cryptocurrency market is affected both by its own application curve and by macroeconomic policies. When there is no obvious independent growth theme in the market, its valuations tend to have an inverse relationship with interest rates, that is, valuations are high when interest rates are low, and valuations are low when interest rates are high. Analysis of the interest rate market can help predict the trend of the cryptocurrency market, but predictions through correlation alone are insufficient. The underlying macroeconomic and policy background must also be considered.
The impact of the Fed’s rate hike and cut cycle on cryptocurrency and Nasdaq
In fact, the Fed's interest rate hike will indeed have a negative impact at the beginning, because the marginal change in the risk-free interest rate is the largest. For example, if the interest rate is raised from a low point, whether it is 50 basis points or 5 basis points, when the base is very small, the marginal change will be the largest. dramatic change. However, as the number of interest rate hikes increases, the base becomes larger and the marginal impact becomes smaller. Therefore, after the interest rate hike ends, the market will often rebound and even enter a bull market stage.
In addition, the performance of U.S. stock companies has recovered very well, which is also an important reason for the market's rise. For example, when Huida's stock price was between eight and nine hundred dollars, the PE multiple was even lower than before 2019. This illustrates that despite a 30% to 40% increase in share prices, valuations have not expanded significantly. In fact, most stock price increases are driven by profits, that is, the company's profit growth coincides with the rise in stock prices.
Therefore, the rebound after the end of the interest rate hike is not abnormal. Instead, it is the result of the reduction of marginal changes and the recovery of corporate performance.
Will artificial intelligence have a big impact on Nasdaq?
I think artificial intelligence will have little impact on Nasdaq. The stocks currently affected by artificial intelligence are all stocks that can reflect performance, such as Huida. Now Microsoft only has investment and no income. In fact, in the U.S. stock market from last year to now, even today, the stocks that have been speculated on have made money because of AI. If you don’t make money, the price may fall if you engage in AI.
U.S. stock investments are also very cautious now, and there is no bubble in AI speculation. For example, after Meta announced a 20% increase in computing power investment, its stock price immediately fell by more than ten percent because the market did not know when these investments would be profitable. The market is very realistic, unlike the concept of speculation in the currency circle. For example, Google is also a major player in AI, but its stock price has also fallen due to poor advertising revenue growth.
Overall, although U.S. stock prices are rising every day, the driving factor behind them is profit growth, not valuation bubbles. Although the PE multiple of U.S. stocks is now at a historical high, it is difficult to push it higher without a large amount of water in the market or the concept of speculation. In the future, if there is indeed a lot of room for imagination in the application of AI, there may be a hype bubble, for example, Huida's PE will be increased to more than 100 times, but the market is still relatively rational at present.
Regarding the situation in the currency circle, I think its correlation with Nasdaq is mainly because both are closely related to interest rates, rather than following each other. Cryptocurrency in particular is more sensitive to interest rates because it has no profit itself and can only look at interest rates. Although a stronger stock market is good for sentiment, it will not directly drive a stronger currency circle. The currency circle needs monetary policy and its own new themes to promote it. Only when these two conditions appear at the same time can it reach a record high. At present, the currency circle lacks an independent application cycle, which is why it is difficult for it to rise to a high level in one go.
There is a high possibility of a bull market in the next year, and risk assets will strengthen after the interest rate hike is suspended.
Risk assets tend to strengthen after a pause in interest rate hikes. Historically, after the Federal Reserve pauses raising interest rates, the economic cycle often enters a recession, because the economy is either overheating or in recession. Raising interest rates is to deal with the overheating of the economy, which will then face a downturn or even recession, then recovery, then overheating, and this cycle continues. After suspending interest rate increases, the economy may enter a recession. The Fed will cut interest rates when it sees that the economy has recessionary momentum, or even enter a continuous interest rate cut channel. The early stages of interest rate cuts are not a good thing, just like the early stages of interest rate increases, because the market has encountered problems.
The market is currently looking at economic data or employment data. Once it gets worse, everyone will be happy and the market will rise. But if it gets too bad, everyone will worry about entering a recession and withdraw. So the data in the coming period will be very critical.
From the perspective of the macro cycle, cryptocurrency has multiple attributes and is actually a procyclical commodity. Using PMI as an indicator of economic activity, cryptocurrencies are also typically in a bull market during periods of PMI expansion. If the current economic situation can be maintained and does not go down, it will be the best situation. Because once the economic momentum goes down, it will enter a lower and lower trend, leading to panic.
If the current economic development momentum can maintain a GDP growth rate of about 23%, and the stock market rises to the current level, everyone may be hesitant and afraid to continue buying, because the valuation is already at a historically high level. Although there is no bubble, no one is willing to push it into a bubble state. Instead, the performance will start to decline if the performance is slightly worse. In this case, funds will look for other allocation targets, and there will be more room for flocking to other assets. For example, the recent Hong Kong stock market has seen a large influx of foreign capital.
Ordinary investors are different from institutional investors. Institutions have new funds coming in every year and have enough patience to make arrangements. They can buy more as the market falls. But ordinary people may not necessarily save more money every year. If the funds are exhausted, they may cut off their wealth at a low level. Therefore, there is a big gap in mentality between ordinary investors and institutions.
How big will the Bitcoin spot ETF eventually be? How much can Bitcoin rise to at most?
I think it is reliable for ETFs to eventually reach 1% of U.S. assets under management. Why did the Bitcoin ETF stop at more than 50 billion? Because you can find a similar reference, such as the largest gold ETF, which is also more than 50 billion in size. When a Bitcoin ETF reaches the same size as the largest gold spot ETF in just over a month after being launched, the market needs a breather. The overall size of gold ETFs is hundreds of billions. I can’t remember the exact number, but it’s at least tens of billions.
The Bitcoin ETF aims to gradually equal the oil ETF, then the largest gold ETF, and then the total gold ETF size. When the Bitcoin ETF exceeds more than 50 billion, the market's imagination will be opened up and it will move to the next stage. Next, we can find some data to estimate the inflow of incremental funds.
The total size of all open funds in the United States is more than 60 trillion, of which the possible potential allocation size is 9.7 trillion. If these funds allocate 1%, there will be an inflow of 97 billion US dollars, 5% allocation is 480 billion, and 10% allocation is 970 billion. But now there are only more than 50 billion. This is only the size of mutual funds in North America and Europe. It does not include unlisted asset management. These are larger but difficult to estimate.
Judging from the SEC’s 13F disclosures, the number of institutions holding Bitcoin is constantly increasing. In February, only a dozen funds held Bitcoin ETFs, but now there are more than 130 funds, most of which are private funds. These institutions also came to test the waters at the beginning, and the actual allocation scale is likely to exceed US$97 billion in the next year.
Another estimation method is to use the total scale of global asset management to calculate and conservatively allocate 0.5% to 5% of incremental funds. The corresponding Bitcoin price ranges from 170,000 to 1.7 million US dollars. This explains why some predict that Bitcoin can reach $200,000 or even $1 million. Assuming that the price of Bitcoin reaches US$230,000, its market value is approximately 4.7 trillion, which is not an exaggeration compared with the market value of existing assets. However, if it reaches US$1 million, the valuation will be extremely exaggerated. It may not be realistic in the short term, but in 10 years the market for these assets will double, and it is possible for Bitcoin to reach $1 million.
Currently, Bitcoin’s market capitalization is equivalent to that of silver, and it will take some events to push it beyond silver on a large scale. Future development depends on the allocation ratio of incremental funds and the market’s acceptance of Bitcoin.
US election, will Trump’s coming to power be good for cryptocurrency?
I believe that with the current relatively favorable macroeconomic background, Bitcoin will not have a particularly large increase in the short term and may fluctuate between 60,000 and 70,000. If the economy cools down steadily in the future and the Federal Reserve successfully starts cutting interest rates, Bitcoin will most likely rise to a range of US$130,000 to US$170,000.
Of course, this requires a certain degree of dovishness from the Fed. For example, the market is now pricing in 25 basis points of interest rate cuts in September and 50 basis points in December, and I don't think that's enough of a rate cut to move the market significantly higher. The market may be looking for a more dovish scenario to make the $100,000-plus target more likely.
If data over the next two months soften further, but only by a limited amount, that could lead to expectations for the Fed's first rate cut in July. If this happens, there will be a higher degree of confidence that the price of Bitcoin will reach $120,000 to $170,000. But if we only cut interest rates twice or even less than twice this year, I think it will be difficult to reach this level this year. Therefore, the price of Bitcoin requires the cooperation of multiple aspects of macroeconomic and monetary policies to achieve a sharp increase.
In the long term, what is the turning point for this bull and bear market? Bull markets generally do not last more than two years.
Historically, bull markets usually end when economic conditions are not so good. It is still difficult to predict when the global economic recession will occur. Last year everyone predicted that there might be a hard landing at the beginning of this year, but in fact the economy is doing very well. For example, the impact of the banking crisis and high interest rates on the housing market was not as severe as everyone expected.
Generally speaking, Bitcoin bull markets rarely last longer than two years. If we count from the low point at the beginning of last year, this bull market has been running for more than a year. There may be a deep adjustment by the end of this year or early next year. This is just a reference and doesn't mean much.
AI is a new variable in the economic cycle. If AI can really significantly improve production efficiency or create new demand, it may trigger a new round of investment and demand trends, affecting the study and judgment of the economic cycle. For example, Google's smart glasses envision that if AI is embedded in the glasses to achieve seamless cooperation, it will usher in an iPhone-like moment.
Another important factor is China's policy. After the epidemic was lifted, everyone expected China to have strong monetary easing or fiscal stimulus, but the rebound only lasted two months. This year, some policies are gradually taking effect, including central bank bond purchases and government direct property purchases, which indicate that China may release water and drive the market. Rising inflation expectations in China could also be a boon for Bitcoin.
The risk going forward is that the U.S. debt burden is getting heavier. If the debt burden is too heavy, it may be difficult for secondary market yields to fall, even with expectations of interest rate cuts. Although the possibility of a debt crisis in the United States is relatively small, because the Federal Reserve can eventually directly buy bonds, the sound of a supply crisis in the United States may cause market shock. Last fall, for example, U.S. Treasury yields rose to 5%, largely due to additional U.S. Treasury debt issuance and inflation expectations.
Overall, the future trend of Bitcoin still needs to be combined with various factors of macroeconomics and monetary policy.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reprinted with permission from: "PANews"
Original author: Wu Shuo Blockchain
