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NewBloc: Analysis of two important factors that create a Bitcoin bull market

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The main reasons can be attributed to two categories: one is the creation of a low interest rate environment, and the other is the strengthening of cross-border capital flows.

The author of this article: Barry, a strategy analyst at New Bloc, has 5 years of foreign exchange and gold market trading experience

New in 2021 Over the weekend, Bitcoin was still skyrocketing. According to Coinbase market data, at 20:00 on January 2, Beijing time, Bitcoin stood above the $30,000 mark and rose by more than $4,000 within 24 hours.

1. Review the Bitcoin bull market in 2017

Because China is a big producer and the U.S. is a big consumer, the CPI difference between China and the U.S. is positive because China has overcapacity and has borne too much of the cost of rising raw material prices, putting pressure on the profits of Chinese foreign trade companies , So I saw that there were supply-side reforms in 2016 (cutting overcapacity, destocking, deleveraging, reducing costs, and making up for shortcomings), and then US inflation began to rise, and interest rates began to rise in 2017.

Since 2010 , the interest rate gap between China and the United States has continued to rise, and capital inflows have continued to promote the strengthening of the renminbi; while US Treasury bond futures bottomed out at the end of 2013, Yields have peaked, the opportunity cost of funds has fallen, and market risk appetite has risen. In 2013, due to overcapacity in China, the rate of return on investment in real entities fell (during 2010 -2017, the difference between the CPI between China and the United States has remained positive), the market risk appetite increased, and the interest rate gap between China and the United States remained high. Funds began to be invested in virtual assets.

Since July 2014, China’s stock market has gradually gone bullish, and since January 2015, U.S. Treasury bond futures Peaked, the yield of government bonds bottomed out, the opportunity cost of funds increased, risk appetite decreased, and profits were taken in China. As the profit-making effect of the stock market continued to expand, domestic funds began to increase leverage and capital allocation flowed into the stock market. Subsequently, under the background of the China Securities Regulatory Commission's investigation of the capital deleveraging, A shares began to collapse in a stampede.

Chinese The foreign exchange reserves peaked in September 2014. There are two main reasons: first, the U.S. bond yield peaked periodically, and the treasury bond yield bottomed out periodically; Withdrawal of hot money), foreign exchange reserves have gone through the process of China Securities Regulatory Commission’s deleveraging and capital allocation review in 2015.

On August 11, 2015, the People’s Bank of China announced the market-oriented reform of the middle price Referring to the closing price of the previous day, and comprehensively considering the supply and demand of foreign exchange, the central parity quotation was finally determined, and a one-time depreciation of about 2% was announced, and then the foreign exchange reserves began to decrease at an accelerated rate.

foreign exchange reserves It stabilized in December 2016. The main reason is that on December 30, 2016, the central bank issued the latest "Administrative Measures for the Reporting of Large-value and Suspicious Transactions by Financial Institutions". or 10,000 U.S. dollars must be reported as a large transaction, while the previous minimum standard was 200,000 yuan. This updated standard came into effect on January 1, 2017.

Just entering 2017, China has strengthened its control over foreign exchange. According to the latest domestic reports, legal The process of exchanging RMB obtained through channels for foreign exchange is more complicated, and the state has stricter regulations on the purchase of foreign exchange by individuals. When buying foreign exchange with RMB, you must fill out the "Application Form for Personal Foreign Exchange Purchase", and for the first time clearly state that the purchase of foreign exchange cannot be used for overseas purchases of houses, securities investment and other businesses. Foreign exchange control did effectively control the further reduction of foreign exchange reserves.

As shown in the figure above, when Bitcoin entered the bull market in 2017, it can be seen that just in December 2016, the slope of the price trend became steeper and the growth rate became faster (the logarithm of the vertical axis has been taken) . After the foreign exchange control, although the foreign exchange reserves have been stabilized and the renminbi has appreciated significantly, the core of the contradiction has not been resolved. Funds continue to flow out through other channels, and the investors who take up the orders are late-entry investors who have increased leverage significantly.

China banned Bitcoin in September 2017 moon. At that time, the People's Bank of my country decided to increase the supervision of Bitcoin and began to close all virtual asset trading platforms at 12 noon on September 27. Users must withdraw all Bitcoins before then. Immediately there was a wave of corrections in Bitcoin, but the speculative fever and low interest rate international hot money continued to push Bitcoin to rise further.

Second, the reasons for the rise of Bitcoin Analysis

The main reasons can be summarized into two categories: one is the low interest rate environment, and the other is cross-border capital flow strengthen.

1. Low interest rate environment

For a long time, European and American markets have been in a period of low interest rates. Even if inflation starts, the Fed is unlikely to raise interest rates. However, hawkish remarks are not ruled out to manage expectations. As shown in the figure below, according to the total annual fiscal deficit of the United States, it can be seen that the deficit will soar in 2020, and the annual interest costs of the U.S. government will eat up a large part of the federal budget. Even small changes will become more sensitive and more likely to crowd out private investment.

Since the outbreak of the financial crisis in 2008, the United States has experienced 3 rounds of QE, and did not start raising interest rates until 2017. The 2020 government deficit is double that of 2009, and the debt burden is much larger than it was in 2009. Therefore, it can be expected that there will be little interest rate hikes in the next 10 years (except for wars in the Middle East), and more is that the government will continue to borrow, partly to repay interest, and partly to increase social welfare.

2. Cross-border capital flow

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In today’s global economic integration, low interest rates of the US dollar, aging population, excessive debt burden of consumer countries, rich and poor The gap is too large, resulting in insufficient domestic demand and excessive hot money. For emerging markets, the main contradiction is the scarcity of foreign exchange and the large inflow and outflow of cross-border capital.

The emergence of encrypted assets provides an important solution to this kind of problem, due to the transaction cost of Bitcoin Low cost, fast transaction speed, large transaction scale and other characteristics, in some countries where capital dominates and controls, capital flight through the Bitcoin channel has formed. The flight of funds has a positive impact on Bitcoin, and the continuous flight of funds has brought a continuous positive impact on Bitcoin. This may also be the core factor for the long-term rise of Bitcoin in recent years.

Third, Bitcoin market outlook analysis

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As shown in the figure above, according to the Bitcoin price and the trend chart of U.S. short-term Treasury bond futures, the short-term U.S. debt bottomed out in November 2018, and Bitcoin bottomed out in December 2018. Interest rate differentials drove capital flows, and the rising demand for cross-border capital flows pushed up the price of Bitcoin.

At present, the new coronavirus is breaking out and spreading in a large area around the world. In order to reduce the negative economic impact of the virus Due to the impact of the impact of debt, the return on investment in the real economy is low, the yield of US Treasury bonds continues to remain low due to the large purchases of the Federal Reserve, and the interest rate differentials with various countries continue to remain positive. These factors combined have led to a large outflow of funds In the United States, the dollar depreciated, and asset prices in various countries rose one after another.

The current relationship between the world and the United States is very similar to that between China and the United States in 2014 (the US Treasury bond yield Interest rates have fallen, and interest rate spreads around the world have continued to widen, leading to low investment yields). Bitcoin bottomed out in 2015, began to rise continuously in 2016, and continued to accelerate in 2017; China's foreign exchange reserves peaked in September 2014, U.S. bond yields bottomed out in 2015, the renminbi began to depreciate, and foreign exchange reserves decreased; at the end of 2016 China began to control foreign exchange, the renminbi appreciated, foreign exchange reserves stabilized, and Bitcoin accelerated. In 2017, the Chinese market accounted for 80% of the bitcoin trading market.

Fourth, Summary

As the subsequent interest rate differentials begin to pick up, Bitcoin's hedging attributes will be more prominently displayed. At present, the Bitcoin bull market is ahead of the gold bull market. Bitcoin’s hedging attributes come from foreign exchange runs, and gold’s hedging attributes come from credit hedging. In the short term, it is necessary to pay attention to technical callbacks. The figure below shows the trend of Bitcoin from 2015 to 2016. It is necessary to pay attention to the sharp correction caused by the long liquidation after crowded trading.