Bloomberg: Anticipating Bitcoin's Coming of Age

彭博社

Read this article in 38 Minutes

In the past, Bitcoin was a speculative asset for appreciation, but it has now transitioned into a value storage mechanism similar to gold, with its maturity continuing to increase.

Author: Bloomberg Intelligence Senior Commodity Strategist Mike McGlone

Original Source: CarbonChain Value

On April 2, Bloomberg released a report titled "Bitcoin Maturation Leap," stating that Bitcoin is preparing for a large-scale bull market. In the report, the author elaborated on the correlation between Bitcoin and the S&P 500 Index, gold, zero interest rates, and negative interest rates. The report stated that stock market volatility has accelerated Bitcoin's transition to "digital gold." We believe that 2020 will be able to determine whether Bitcoin can transform from a risk-on speculative asset to "digital gold." From a volatility perspective, Bitcoin's volatility appears to have decreased, while stock market volatility has started to rise, prompting more people to move funds into crypto assets.

The report suggests that the initial correlation between Bitcoin and gold was depressed due to the stock market downturn, but now, with global central banks implementing unprecedented quantitative easing policies, the correlation between Bitcoin and gold has reached a historical high. Bitcoin's correlation with stocks has decreased, while its correlation with gold has increased. We believe that when the S&P 500 Index sharply declines, people will start paying attention to other risk assets, at which point Bitcoin's price foundation will further solidify, and its correlation with gold will also grow. Our chart depicts the 52-week correlation trend between Bitcoin and gold, and you will find that the current correlation between Bitcoin and gold has reached its highest level since 2010. The correlation between Bitcoin and gold is twice that of Bitcoin and stocks. In the past, Bitcoin was a speculative appreciation tool, but it has now transformed into a value storage mechanism similar to gold, with its maturity continuing to advance.

Below is the full report:

· Bloomberg Crypto Outlook

· Bitcoin Maturing Amid Financial Crisis Environment

· Stock Market Volatility Accelerating Bitcoin's Transition to "Digital Gold"

· Futures ‘Taming’ Bitcoin, Paving the Way for Its Digital Gold Version

· Enhanced Correlation Between Bitcoin and Gold

· COVID-19 Pandemic Strengthening Some On-Chain Bitcoin Metrics

· COVID-19 Pandemic Might Revive Libra and Spark the Concept of Digital Dollar

Bitcoin Maturing Amid Financial Crisis Environment

(Bloomberg Intelligence) — We believe that Bitcoin being dragged down by the current stock market volatility is only temporary, and the ultimate result may evoke memories of gold after the 2008 financial crisis. Bitcoin is the first-generation cryptocurrency that emerged in 2009 and has performed relatively well. Although its risk, calculated by volatility-weighted metrics, is five times that of the S&P 500 Index, its 2020 decline was only a quarter of the S&P 500 Index. For an asset that has been around for only 10 years, Bitcoin’s 24/7 price transparency, no limit, circuit-breakers, or third-party supervision have contributed to its remarkable achievements.

In 2020, it is a critical year for Bitcoin’s transition to quasi-currencies like gold, and we hope that Bitcoin can pass this test smoothly. Bitcoin is different from the traditional stock market but somewhat similar to gold; although it has been impacted during this period, under the unprecedented global quantitative easing monetary stimulus policies by central banks worldwide, Bitcoin’s foundation is becoming increasingly stable, and its adoption has also seen significant growth.

Common Risks with Stock Market

After the financial market turbulence, although the prices of Bitcoin and gold experienced some decline, they quickly rebounded. We believe that this year's stock market volatility has supported the appreciation of Bitcoin and gold prices. Bitcoin and gold seem to be consolidating their bull markets, and compared to the stock market, Bitcoin and gold took less than two months to return to support levels.

Amid Stock Market Plunge, Bitcoin Quietly Nearing Bull Market

Looking at historical data, it is evident that after every market turmoil, Bitcoin has rebounded with strong momentum. The Bitcoin block reward halving, which leads to a reduction in supply, will also be a key driver of its price growth. Based on our chart analysis, the 2020 Bitcoin decline has stayed above the 2018 lows, with the low point about 80% off the price peak. In contrast, over the past month, the S&P 500 Index has fallen below prices from two years ago after hitting all-time highs. The disruption caused by the COVID-19 pandemic on the global market is akin to the financial crises of 2008-2009 and 2000-2002, but its duration and impact are much greater.

As global stock markets begin to recover gradually, under the current unprecedented global monetary stimulus policies, Bitcoin and gold will emerge as primary beneficiaries.

Compared to other cryptocurrencies, the COVID-19 pandemic has accelerated Bitcoin's value proposition in the macroeconomy. Speculative frenzy seen in the Bloomberg Galaxy Crypto Index (BGCI) at the beginning of 2020 has dissipated. As of April 2, the Bitcoin price in the index has risen by nearly 40% over the past year, while the BGCI has dropped by about 13%. Our charts illustrate Bitcoin's recovery from the downturn below the 52-week moving average line, at a pace faster than other cryptocurrencies.

Bitcoin's Advantage over Competitors Will Continue

Initially, the correlation between Bitcoin and gold was dragged down by the stock market decline, but now, as central banks worldwide have implemented unprecedented quantitative easing policies, the correlation between Bitcoin and gold has reached a historic high.

Zero interest rates and negative interest rates have boosted the price of gold. We believe that the current market conditions are favorable for a gold price increase. However, there are some key risks that could derail the gold bull run (in fact, such risks have been prevalent for much of the past decade), including: a rapid stock market surge, a strong dollar, and rising real interest rates, all of which emerged after the gold price hit a historical high in 2011. With benchmark interest rates at zero or negative, the Fed beginning to enact unlimited quantitative easing monetary stimulus akin to 2008, we expect the next phase of the gold price to potentially see a stair-step recovery process, continuing up to a peak of $1,900/oz.

Next Stage of Gold Recovery: Breaking the $1900 Peak

If following the "script" of the 2008-09 financial crisis, the next step may signal a gold price recovery. The price threshold that gold broke above post the global financial crisis that year was $1,000, which in today's market climate, could be equivalent to $1900.

2020 may test Bitcoin's maturity

The stock market turmoil has accelerated Bitcoin's transition to "digital gold." We believe that 2020 will be able to determine whether Bitcoin can truly evolve from a risk-on speculative asset to "digital gold." From a volatility perspective, Bitcoin's volatility appears to have decreased, while stock market volatility has started to rise, leading more people to move their funds into crypto assets.

The correlation between Bitcoin and stocks has decreased, while the correlation with gold has increased. We believe that when the S&P 500 index rapidly declines, people will begin to pay attention to other risk assets, at which point the foundation of the Bitcoin price will be further consolidated, and the correlation between Bitcoin and gold will also increase. Our chart depicts the 52-week correlation trend between Bitcoin and gold, revealing that the current correlation between Bitcoin and gold has reached its highest level since 2010. The correlation between Bitcoin and gold is twice that of Bitcoin and stocks, with Bitcoin having transitioned from a speculative appreciation vehicle in the past to now serving as a value store mechanism similar to gold, with maturity continuing to improve.

Bitcoin Transitioning from "S&P Bear" to "Gold Bull"

Bitcoin has returned to the 2018 price consolidation range (around the $6000 range), so this recent period is very worth paying attention to, as Bitcoin is likely to have another bull run after the gold bull market.

Cryptocurrency Performance on BI COMD

(As of 8 AM New York time on April 2)

From a volatility perspective, Bitcoin's performance appears to be better. If historical data can be used as a reference, you'll find that traditional stock market volatility is on the rise while Bitcoin's volatility is steadily decreasing, a trend that bodes well for Bitcoin's trajectory. In the past year, although Bitcoin's annualized volatility was about 5 times that of the S&P 500 Index, in 2020, Bitcoin's average volatility actually dropped by only about 5%, while the stock index dropped by nearly 22%. For more mature assets, this metric would be seen as a sign of strength differential, also signaling that Bitcoin is beginning to transition to higher adoption, maturity, and performance, much like gold.

Volatility Trend Favors Bitcoin Over Stocks

Our chart shows that Bitcoin's 260-day volatility has decreased, while the S&P 500 Index has been affected by stock market turbulence, causing its volatility to rise. In comparison to the S&P 500 Index, we see that Bitcoin, with its lower volatility, has started to rise in price.

Gold and Bitcoin have emerged from adversity. We believe that the appreciation of gold and Bitcoin is mainly due to the need for safe-haven assets as the market experiences significant turmoil. If historical data is any indication, then for the stock market to recover to its previous state in 2020, it might take a longer time (especially considering the COVID-19 pandemic). While Bitcoin did experience a sharp drop, it was likely temporary, as both Bitcoin and gold saw a rebound. According to our chart analysis, gold and Bitcoin prices initially fell by around 40% and 80% from their peaks, respectively, but quickly recovered, with a more solid price foundation.

Bitcoin and gold prices rebound, while stocks fail to turn

The S&P 500 Index actually hit a historic high just over a month ago, but with the outbreak of the COVID-19 pandemic, much of the past market analysis seems to have been "invalidated." From a 52-week perspective, the historical decline of the S&P 500 Index reached 14%, while during the 2000-01 and 2008 global financial crises, the S&P 500 Index dropped by over 35%.

Futures "Tame" the Bitcoin Bull Market

Futures have "tamed" the digital gold Bitcoin. The previously surging Bitcoin bull market was tamed with the introduction of CME futures, but we believe this is also part of Bitcoin's transition to "digital gold." The increase in open interest and trading volume in Bitcoin futures signifies a growing adoption of Bitcoin, which is crucial for the supply-constrained emerging digital asset Bitcoin.

Futures help "tame" the Bitcoin bull market. The increase in futures open interest indicates a higher mainstream adoption of Bitcoin. While volatility is expected to continue to rise, it will also boost prices. With Bitcoin's limited supply, demand and adoption rate will be key factors in determining its price. Our charts depict the "taming" process, showing the upward trends of Bitcoin futures open interest and price. The recent stock market turbulence marked the most severe one since the launch of Bitcoin futures, "stimulating" Bitcoin to return to a price range most conducive to trading: just below $7,000.

Bitcoin futures open interest and adoption rate are both increasing

Despite stock market volatility, the increasing open interest in Bitcoin futures, decreasing volatility, and a strong price performance all suggest that Bitcoin is transitioning from a speculative crypto asset to "digital gold." Over the past year, Bitcoin has seen a price increase of around 40%, while the S&P 500 Index has dropped by 15%.

The rise in futures trading volume and Bitcoin's maturity. We believe that the increase in Bitcoin futures trading volume signifies the "taming" of a highly speculative bull market. In the first quarter of 2020, CME Bitcoin futures contract trading volume grew by approximately 120% year over year, reflecting a maturing market. Bitcoin has recovered from the bear market, and the emergence of Bitcoin options indicates growing mainstream adoption. Our chart illustrates the stable performance of Bitcoin's 30-day average futures trading volume, and Bitcoin's price has returned to a range that is most conducive to trading, all supporting our view of a bull market consolidation.

Futures Settlement Broadens Bitcoin's Market Reach

Bitcoin-Gold Correlation

The correlation between Bitcoin and gold has further strengthened. Historical data shows that after every significant Bitcoin price fluctuation, a price surge seems to follow. The trend in Bitcoin's price appears to be increasingly similar to that of gold. The decrease in Bitcoin's volatility alongside the rise in gold prices both indicate a more solid correlation between the two.

There is also an increase in the correlation of the price trends between Bitcoin and gold. As gold prices continue to rise, the decrease in Bitcoin's volatility supports the rise in Bitcoin's price. Our analysis chart shows that Bitcoin's 180-day volatility has declined, while the price of gold has increased, a situation similar to that of 2015 when the Bitcoin-to-gold price ratio reached its lowest point before embarking on a bull run that lasted until 2017's price peak. Bitcoin's natural maturity has led to a decrease in volatility, and when volatility bottoms out, price rallies typically ensue.

Bitcoin Volatility Decreases, Gold Volatility Increases

Gold volatility hit a nearly two-decade low in 2019 but has since increased, with prices rising steadily, perhaps fueled by this volatility. In contrast, Bitcoin volatility has actually decreased. The 180-day Bitcoin volatility index is significant, hitting a historic low around 40% in October 2015, marking the start of a Bitcoin bull run.

Bitcoin's risk-on asset attribute has diminished. We believe that with the decrease in supply due to Bitcoin's block reward halving, the current price pressure may only be temporary. When the S&P 500 fell nearly 14% in Q4 2018, Bitcoin dropped around 45%, and both bottomed around the same time. This suggests that Bitcoin is still susceptible to stock market downturns, but there may be differences in upswings. For example, in 2020, while the S&P 500 fell by 20%, Bitcoin rose by about 9% and hovered around the $8,000 support level. Our analysis chart illustrates the correlation between Bitcoin and the S&P 500, especially when the stock market is rapidly declining, this correlation becomes more apparent.

Bitcoin is now more resilient compared to its performance during the 2018 stock market plunge.

The COVID-19 pandemic has led to some on-chain strength in Bitcoin.

The COVID-19 pandemic has instead "stimulated" positive on-chain metrics for Bitcoin. The strong performance of Bitcoin's on-chain metrics has provided solid support for price increases, with the pandemic "stimulating" Bitcoin's performance in the entire cryptocurrency market. Current on-chain metrics such as active addresses and adjusted transaction volume indicate that Bitcoin has established a strong foundation. We believe that the upcoming Bitcoin block reward halving in May will also serve as another driver for Bitcoin's price increase.

Bitcoin Halving vs. On-Chain Metrics. Reduction in Bitcoin's supply vs. key on-chain metrics.

On April 2, the price of Bitcoin was around $6,600, but at this time, the 30-day average of active addresses was close to the level when Bitcoin was priced at $9,000. We find that the 10-day average transaction price is a more reliable price indicator, given Bitcoin's limited public ledger and increasing adoption, both of which are critical price determinants.

The increase in the number of Bitcoin addresses supports the idea of Bitcoin transitioning to "digital gold."

Transaction volume and addresses are both showing an upward trend.

Blockchain Primer: Outlook

The COVID-19 pandemic may breathe new life into Libra and determine the fate of the Fed's digital dollar

SpiritContributing Analyst Ben Elliott (Government)

The COVID-19 pandemic may highlight cash transactions based on outdated technology and the existing flaws in the market, prompting the Federal Reserve to reconsider issuing a digital currency. It may also revive the Facebook digital currency Libra and lead financial institutions offering mortgage services, such as Wells Fargo, Truist, and Bank of America, to seek technological upgrades. However, the Fed's digital currency or payment applications may undermine the role of commercial banks.

The COVID-19 pandemic has exposed technological gaps but has also brought opportunities. The pandemic may shift investors' focus to blockchain technology and leverage this emerging technology to address various vulnerabilities that arose during the outbreak. While investors believe that significant funds may not translate blockchain technology into tangible business outcomes, the shift to remote work for many in early 2020 due to the pandemic may bring changes to the blockchain industry. Investments in this sector often exhibit a cyclical logic, where funds tend to chase those already providing good service or addressing regulated market niches.

Venture Capital-Backed FinTech Financing

Considering that investors may start to contemplate the economic pressures of large-scale isolation, we believe the mortgage market could be a potential hotspot. Contactless transactions (not just payments) and data ownership "status" will also rise, with these areas potentially becoming focal points.

A central bank digital currency may compete with Libra. If the Fed and other central banks decide to achieve a cashless society through issuing digital currency, commercial banks could potentially play a key role in it. If non-bank financial firms can directly access central bank money, it could have unintended consequences for the Fed and render the "middlemen" unable to perform their credit creation and maturity transformation roles. While legislation may be required, the economic downturn sparked by the COVID-19 pandemic could spark the Fed's interest in a central bank digital currency, a tool that could provide more direct stimulus measures outside of the financial markets.

BIS Analyzes Bitcoin's Position in the Global Financial System

If digital currencies like Facebook's Libra become popular, central banks may accordingly adjust their strategies. If alternative digital currencies like Bitcoin are deemed to withstand crises such as the COVID-19 pandemic more easily than before, the Fed may need to adopt a more open attitude towards regulated private money.

Wholesale digital tokens could reshape bank liquidity. Blockchain-based wholesale digital tokens—such as JPM Coin introduced by JPMorgan—could bring disruptive innovation to interbank payments this year. Once the underlying principles are understood, certain blockchain applications can be used to address liquidity issues that arose during the COVID-19 crisis (especially in mortgages). Large banks may have a first-mover advantage in establishing a more efficient, cost-effective dominant settlement platform. To some extent, wholesale tokens represent claims on safe-haven assets like the dollar, central bank reserves, or treasury securities, and we believe regulatory bodies will encourage more technological innovation in the coming years.

BIS Evaluates Tokenization Models

Wells Fargo, JPMorgan, US Bancorp, Truist, and Citizens are all among the top 20 mortgage lenders in the U.S. who could benefit from blockchain mortgage technology.

The market infrastructure may eventually be transformed. In recent years, many blockchain projects may have been more hype than substance, failing to deliver returns. Ripple Labs partnered with MoneyGram in 2019, indicating that the market still sees potential for disrupting traditional cross-border payments; however, Ripple's own cryptocurrency exposure could threaten its enterprise software business, with project investors like Mastercard, Visa, Capital One, CitiGroup, and Bank of America possibly just hedging their bets. With backing from JPMorgan and Wells Fargo, Microsoft and IBM are applying blockchain to market infrastructure, competing against each other.

Key Points:

Central bank wholesale payment systems should operate like blockchain, hence the urgent need for these traditional systems to be updated. In 2016, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) suffered an impact from a mere fax machine failure. Encountering this issue, Nasdaq, Intercontinental Exchange, CME Group, and other exchange operators running on centralized ledgers would not stand idly by.

Is blockchain a dull and regulated financial market tool? In fact, for banks and exchanges leveraging blockchain for large-scale clearing, settlement, and payments, common standards and platforms are two critical factors, but any new system will face intense scrutiny from government regulators. The U.S. Treasury and the Federal Reserve continuously monitor financial market infrastructure and designate Financial Market Utilities (FMUs) under the Dodd-Frank Act.

Systemically important FMUs are subject to rigorous oversight and are either quasi-governmental utilities or jointly owned by participants.

Key Points:

We believe that some private enterprises are very interested in creating a stablecoin based on a government's security asset reserve, but they still have a long way to go, as creating an easily operational currency-like asset outside the commercial banking system would attract significant attention and concern from regulatory bodies.

Bloomberg Key Page Screenshots (8:00 am New York Time, April 2)