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NewBloc: Thoughts on Bitcoin's long-term value and short-term fluctuations

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The Federal Reserve's balance sheet and global debt hit record highs. At the same time, assets such as US stocks, gold, and Bitcoin all hit record highs.

Original author: New Bloc strategic analyst Pan Zehua, a 5-year foreign exchange gold market trader;

New Bloc strategic analyst Kang Kang, former Odaily Planet Daily analyst.

Analysis of this issue

1. ; The U.S. dollar index has bottomed out and the 10-year U.S. debt has strengthened, short-term risk assets may face the risk of a correction;

2. Graycale’s increase in holdings has slowed down, and the leverage of spot margin financing and securities lending has reached a new high in half a year;

3. The Bitcoin quarterly contract is approaching delivery, and the futures open interest has repeatedly hit new highs, so pay attention to downside risks;

4. According to the MMT theory, the volatility of digital assets will continue to decrease;

5. The correlation between Bitcoin and other global financial assets such as gold and the S&P 500 index is getting stronger and stronger.

2021 World Economic Deduction

Since 2020, due to the new crown epidemic, the central banks of various countries have fully exerted their monetary and fiscal policies. In this context, we can see the balance sheet of the Federal Reserve, and global debt has hit a record high. Assets hit record highs. Applying the MMT theory, the rise of risky assets relies on the debt of the household sector, and the transfer of debt from the corporate sector to government sector debt.

Based on MMT, we know that government borrowing is one of the manifestations of the net financial assets obtained by the household sector and the corporate sector It is the rise of asset prices, so we need to pay close attention to whether the government deficit will continue to expand. In the context of the Great Depression in the 1930s, Keynesianism prevailed. Keynes pointed out that the emergence of the Great Depression was caused by insufficient effective demand and investment demand, and the government could completely avoid the Great Depression through monetary policy and fiscal stimulus . But today, Keynesianism has come to an end, global central banks have maintained low interest rates, and it is almost impossible to lower interest rates, and the scale of global fiscal policy debt has exceeded 100% of GDP, which will lead to two paths next year:

1. Inflation has little change, and next year’s GDP will not grow positively due to the debt crisis or other reasons, which means that the government Borrowing will be accelerated, and the government's borrowing (central bank purchases) will enable enterprises and the household sector to obtain net financial assets, which is good for asset prices.

2. Inflation has not changed much, and next year’s GDP rebound, that is, economic recovery, will mean that the government will borrow money The measures were effective, demand picked up slightly, and the automatic stabilizers of the economy eased government debt due to economic recovery, reduced social welfare expenditures, and increased taxation, which reduced the financial wealth of the household and corporate sectors, which was not conducive to the performance of asset prices.

There are two reasons for not mentioning the possibility of inflation above.

One: in today’s global economic integration, its global division of labor and cooperation, the industrial structure of each country is different, emerging Due to the low price of manpower and capital, the market is responsible for processing and manufacturing, etc., relying on the development of the secondary industry to drive GDP, while developed countries rely on consumption and rely on the tertiary industry to drive GDP. The current problem is the decline in consumption in developed countries due to the large gap between the rich and the poor, excessive debt, etc., while emerging market countries assume the functions of global production, manufacturing and processing, and appear to have excess capacity when demand shrinks.

At present, with the financial and monetary support of the central banks of various countries and due to the epidemic, the inventory of various commodities is at a low level, so the market Inflation expectations are high, but for emerging market countries with excess capacity and developed economies with high debt, the process of replenishing inventories will be very fast, and low inventories may also be a problem for mining companies to finance through commodities. Inventory status, so a new demand is derived here, that is, financing demand, and financial demand is often reflected by interest rates. Therefore, it is financial demand + industrial demand that jointly push up the price of copper.

The second is the impact of the crude oil market on inflation and deflation. The crude oil market is an oligopoly market, so more should Analyze it from the perspective of supply and game theory. In 2014, the U.S. shale oil revolution caused Brent crude oil to fall from $113 to $32. Saudi Arabia, a major oil producer in the Middle East, has higher production costs, sales costs, and financial costs than U.S. shale oil, so Saudi Arabia’s supply is more elastic In the future, with the large fluctuations of crude oil, the market share may become smaller and smaller. When the market share is seized, the crude oil price basically does not rise sharply. It is more likely that the market will continue to seize market share after the market stabilizes. Therefore, the risk of future deflation remains (Of course, if there is a large-scale war in the Middle East, say otherwise).

The evolution of the first path may be due to the continuation of prudential motives to maintain high savings rates, insufficient consumption or government fiscal Stimulus continues to stalemate, the bad debt ratio continues to rise, and the debt crisis emerges. The government realizes that a debt crisis may occur and continues to expand the deficit. Residential and corporate sectors continue to acquire net financial assets, which is positive for asset prices.

The evolution of the second path may be the advent of vaccines, the marginal propensity to consume rises, and GDP picks up. With automatic stabilizers in play, government debt eased and asset prices began to come under pressure. What may happen is after the second quarter of next year.

The subprime mortgage crisis in 2008 triggered a liquidity crisis, and the two parties are still indecisive, leading to the global financial crisis . Whether the United States will continue MMT, in the short term, the Federal Reserve has limited information on the huge market, which may cause the Fed to misjudge, so it is uncertain in the short term and needs further observation, but in the long run, it seems that the Fed has no more options. Because the core problem of debt is the problem of population in the end, there is no more population to maintain debt, and the Fed can only continue MMT.

From Hayek's "Denationalization of Money" to Bitcoin

As we know, the existence of finance is the discounting of future cash flows, so we can consume ahead of time, but our debt will become larger and larger, which will inhibit future consumption.

Source: wind, CITIC Securities Research Department

As shown in the picture above, we can observe that from the 1980s to the present, the interest rate trend has returned to 0. After the collapse of the Bretton Woods system → the Middle East retaliation led to the first oil The outbreak of the crisis → the formation of severe stagflation in the United States → Federal Reserve Chairman Volcker sharply raised interest rates → production capacity cleared → Kissinger visited Saudi Arabia and promised protection and assistance to Saudi Arabia → the lifting of the oil embargo and the establishment of the petrodollar standard → the lifting of stagnation rise. The economic structure of the United States has also begun to shift from the production, processing and manufacturing secondary industry driving GDP to the tertiary industry driving GDP structure.

The period of structural transformation in the United States is also the beginning of global economic integration. The promotion of cooperation drives the global economy, and the improvement of global economic integration promotes the world's demand for US dollars. In order to maintain the stability of the currency value and maintain the credit of the US dollar, the US dollar needs a current account surplus to maintain market balance.

The current trade war between China and the United States is due to China’s continuous double surplus imbalance. What we are facing now is the collapse of the US dollar system, just as the Triffin Dilemma warned us that the monetary system that relies on sovereign national currencies as international solvency will inevitably fall into the "Triffin Dilemma" and collapse. In this context, the birth of the blockchain is expected to solve the trust problem and reshape the global currency system based on its distributed, decentralized, trustless, non-tamperable, and non-deletable features.

The specific path I boldly guess is that the blockchain first uses the sovereign currency development project to connect with the real economy, and then the sovereign state When a crisis occurs, de-dollarization or sovereign currency is used as the medium (when the credit crunch costs too much to hold dollars, liquidity is threatened, assets will be sold in exchange for dollars to obtain liquidity, and when the tightening is too fast, a large number of sell-offs will make the market volatility is too large), and then trade through LIBRA, which is a common currency (anchoring a package of commodities). It is somewhat similar to Hayek's "Denationalization of Currency" prospect. If it is really deduced as above, the volatility of digital currency may drop significantly.

What is the value of Bitcoin from the perspective of cross-border capital flow?

Emerging market countries usually develop their economies through resource endowment advantages, production, processing, manufacturing, rising interest rates, Inflation, economic growth, employment, strong stock market performance, current account surplus, capital inflow, when the advantage of resource endowment is no longer sustainable, the return on investment narrows, capital starts to promote the prosperity of the virtual economy under a strong currency, and finally when the debt is unsustainable The bubble burst, and capital fled to run on foreign exchange reserves.

Because of the low cost, high speed and large scale of Bitcoin transaction, the Bitcoin channel has formed in some capital control countries Capital flight, even brought serious short-term abnormal international capital flows, Thailand during the military coup in May 2014, Poland during the Russian financial market crash in December 2014, South Africa during the riots in April 2015 and Poland in 2015 During the general election in May, there were signs of abnormal outflows of domestic capital with the help of Bitcoin. In today's emerging markets, the frequent depreciation of currencies is more due to the scarcity of foreign exchange, and the characteristics of blockchain technology are expected to truly achieve the assumption of purchasing power parity.

Now, under the background of the Federal Reserve's large-scale release of water, the yield of treasury bonds keeps falling, and the real interest rate under the condition that inflation does not fluctuate significantly It keeps going down to a negative value, which makes the opportunity cost of holding assets lower, and even encourages people to hold assets.

Source: Oriental Fortune

As shown in the picture above, it is the US 10-year Treasury bond futures. The rise of Treasury bond futures reflects the decline of Treasury bond yields. Now, the benefits of vaccines are good for economic recovery in the short term, and the yield of government bonds is rising. However, in the long run, the global economy is constrained by a series of problems such as population aging, huge debt scale, and debt problems caused by geopolitical, political, and class conflicts.

Source: LongHash

Treasury bond yields began to decline in October 2018, corresponding to the Federal Reserve's interest rate cuts and the beginning of a wide fiscal cycle. Later we also saw that gold bottomed out in October 2018, the S&P 500 bottomed out at the end of October 2018, and Bitcoin bottomed out at the end of December 2018. And after that, their correlation became stronger and stronger. The logic behind it is that under the easing cycle, the degree of derealization of the global economy is deepening, and financial demand drives the correlation to become stronger.

Source: Incrementum AG

The picture above is a very interesting picture, which often happens when the ratio keeps falling It is a bubble economy. It can be seen that the ratio has been falling since 2010. We don’t know when the bubble will burst in the future. It may be a misjudgment by the Fed, or a war broke out in the Middle East, etc., but what we know is the tool of the Fed. Therefore, it can be predicted that the Fed does not dare to predict ahead, and is more conservative, waiting for data to come out or events to occur before making changes. This is good for financial assets again.

If the bubble bursts, the possible fuse is the outbreak of war in the Middle East, the outbreak of war Oil has risen sharply, inflation expectations have risen sharply, nominal interest rate expectations have risen, investors' risk appetite has begun to weaken sharply, financial assets are sold ahead of schedule, liquidity is tight, debt leverage bursts, and finally the entire bubble bursts. At this time, it depends on the Fed's action time and when to continue MMT to fill the debt.

The current strength of gold is not entirely driven by the risk aversion attribute, but more because of the sharp increase in nominal interest rates in 2018 The rapid decline in real interest rates caused by financial demand drives up asset prices. The chart below shows the ratio of the price of gold to the S&P 500 index.

Source: Tubiao jia

Source: Coin Metrics

Looking back at history in the 1980s, gold as a safe-haven asset greatly outperformed the S&P 500 Index as a risk asset. The above correlation also shows that the correlation of gold, Bitcoin, and the S&P 500 index also shows that they all have a strong correlation now. Therefore, it is too early to say that the high correlation between Bitcoin and gold is a gold-like credit hedging asset. However, there are many similarities between gold and Bitcoin:

1. Gold is physically stable and easy to store, while Bitcoin It is safe, anonymous, tax-free, and free from supervision;

2. The gold reserves are low, and the annual output is limited. Bitcoin mining The cost of mining is high, which is halved every four years, and the output is limited;

3. Gold has been used by countries all over the world in history It is widely used as a currency, and gold reserves have become an important support for stabilizing currency value and exchange rate; similarly, if LIBRA becomes a common currency in the future, Bitcoin will have an important support for being stored by Facebook and stabilizing Facebook's operations.

In the future, if more people think that Bitcoin and gold are both safe-haven assets, it is also possible that under this expectation Achieving desired self-actualization.

As shown in the picture above, we can see that since the 1980s, the nominal price of gold has been moving closer to the real price. The logic behind this is that due to the division of labor and cooperation in the global economy, the price of raw materials has risen due to inflation Emerging market countries are more responsible, and their output is gradually surplus, leading to lower export prices. Therefore, since the 1980s, the correlation between gold and inflation has gradually weakened, and the problem of excess capacity and deflation is obvious. Debt-deflation The vicious circle problem is obvious.

Gold credit hedging as a safe-haven asset may gradually emerge in this process . Among them, Bitcoin has a high correlation with the trend of gold. Whether Bitcoin also has credit hedging is unknown now. If the correlation between gold and the S&P 500 index weakens in the future due to debt problems, Bitcoin still has a strong correlation with gold. It can be judged that Bitcoin also has credit hedging properties.

To sum up, what needs to be paid attention to in predicting future trends is whether liquidity will continue, Rather than a safe-haven property, gold's long-term safe-haven property is a credit hedge for the government. Although the economy is not balanced now. Under the US dollar system, the imbalance characteristics of the global economy generated by international trade and capital flows are as follows:

1. The United States is still It is the core country with a large current account deficit;

2. The surplus of emerging market countries and developing countries has increased significantly;< /p>

3. The growth rate of trade and investment far exceeds GDP, and the development of the virtual economy is accelerating. The scale of global economic imbalance is against this background continue to expand. It can be seen that in the US dollar system, the root causes of trade and economic imbalances have not been eliminated, and there is a tendency to further deepen in the high-speed capital flow. In addition to the trade deficit channel, the capital account is another important channel for the US to export liquidity. As the global demand for reserve assets increases, the market's demand for safe assets with sovereign financial solvency will also increase.

This means that the issuance of government bonds will expand with the expansion of global demand for reserve assets, but the scale of bond issuance The negative effect on the solvency of sovereign bonds will also become greater and greater. Considering the general debt scale and yield level of developed countries, we are facing an unsolvable paradox. Now DeFi is expected to establish a brand new financial system to solve the long-plagued Triffin puzzle, but how it will evolve in the future needs further observation.

The U.S. dollar index has bottomed out for a short time, and global risk assets may face a short-term correction

Source: Oriental Fortune

As shown in the figure above, the U.S. dollar index and U.S. bonds have ushered in resistance and strong support respectively. As of December 11, they closed at 90.99 and 137.7344 respectively; combined with current events, the Federal Reserve will usher in a meeting next Thursday , it is expected that next week there will be a shocking trend around resistance and support levels. During this period, the price trend of copper is stronger, which means that there are better expectations for the future economy; the yield of treasury bonds is higher, and gold is weaker. Wait for the new news from the Federal Reserve next Thursday. The market may choose a direction, and the Fed may also Waiting for the US fiscal stimulus news, maybe the Congress will not announce too much information, and the probability of market shocks is expected to be too high; the short-term bottoming of the US dollar index and the continued strength of US bonds, global risk assets may face the risk of a short-term correction.

Economic uncertainty is soaring, it is difficult to hide the decline of Bitcoin at a large level

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Source: Oriental Wealth

As shown in the above picture, after the high volume of Bitcoin fell, it rebounded again to a new high Afterwards, it began to shrink and adjust. From a technical point of view, this position is mainly based on sideways exchange of chips. The volatility may gradually decrease in the near future. After a full change of hands, choose a direction. On the news side, focus on fiscal policy and the Fed's movements, whether it will further loosen liquidity and expand the inflow of incremental funds. It is necessary to pay attention to the changes in market sentiment on the disk, and the deterioration of sentiment may also break the position before finding support.

Source: bybt

According to bybyt data, the current bitcoin trust fund Grayscale holds 553,500 BTCs, accounting for 2.98% of the total bitcoin circulation. Although the holdings continue to increase, the rate of increase It has slowed down. Once the upward trend reverses, the current long positions will become potential short positions, which is analogous to the changes in the positions of the gold SPDR Gold Trust ETF from September to October; from the data of spot margin trading and securities lending, leveraged long and short positions are relatively high. Weekly rose 60%, indicating that the current bullish sentiment is heavy, pay attention to risks.

Source: dyhjw.com

The quarterly contract is approaching delivery, you need to pay attention to downside risks

Source: bybt

Bitcoin futures data service website bybt shows that as of December 11, the number of Bitcoin positions on the entire network It is 378,300 pieces, reaching 4.749 billion US dollars, which is at a historical high. The increase in open interest often means that a change is approaching.

Source: OKEx

Recently, the quarterly contract premium has declined, from last week’s high of 1.5% to the current 0.44%. Bitcoin’s quarterly contract is still 14 days away from delivery. From a perspective, the performance of quarterly contracts in the month before delivery is mostly weak (quarterly contracts account for more than half of the open interest in the entire Bitcoin futures market). Judging from the data of spot margin trading and securities lending, leveraged long and short positions have risen by 60% compared with last week , indicating that the current bullish sentiment is heavy, and it is recommended to pay attention to risks before quarterly contract delivery.