How will the narrative of BTC be in 2022?

picture from: OKLink

As an alternative indicator of expected economic growth, the real interest rate (TIPS) fell overall, from 1.57 in April 2020 to -0.98 at the end of 2021, while inflation Interest rates and nominal interest rates have risen as a whole. It can be inferred that the traces of policy (fiscal policy and monetary policy) stimulus are more obvious in the economic recovery on the surface.

2. Fiscal Policy & Monetary Policy: Guiding Direction

Because the United States is the world's largest The US dollar is also the joint of global monetary liquidity, so this part of the analysis focuses on the US fiscal policy and monetary policy. The U.S. Congress sets the government's fiscal policy, and the Federal Reserve sets monetary policy. The latter bears the triple OKR entrusted by Congress to keep long-term interest rates stable, the long-term value of the dollar (inflation) stable, and maximize employment.

Fiscal policy and monetary policy are the supply side and demand side of the transaction level respectively.

Since the outbreak of the epidemic in 2020, the supply side has been relatively stable, and a series of strong fiscal stimulus has been introduced. After 22 years, the stimulus began to decline. According to the budget of the Congressional Budget Office, the fiscal deficit in 22 years will drop from 3 trillion in 21 to 1.2 trillion.

Monetary policy in recent years is mainly the regulation of QE and the federal funds rate. Since 2008, major central banks have pumped over $25 trillion into the global economy, with over $9 trillion of that in bond-buying “mint” in response to COVID-19 alone. Currently, central banks around the world need to unwind large-scale asset purchases without affecting economic growth.

The US monetary policy in 2022 will focus on reducing debt and raising interest rates, and what we usually call "interest rate hikes" is to raise the federal funds rate (FFR). Buffett likens interest rates to the gravity of the stock market. The higher the interest rate, the greater the gravity.

First of all, based on various information, the purpose of this round of interest rate hikes is to prevent excessive inflation in the United States. Since the beginning of 21 years, the CPI and CPE indexes have continued to rise. The Fed also admitted that inflation is not temporary, which means that the Fed has begun to deal with inflation.

Secondly, in order to balance the employment rate and inflation rate, and learn from the situation of the previous cycle to avoid the reappearance of "taper panic", it is expected that the Fed will still test the market steadily Reaction.

Fed Chairman Powell said after the FOMC meeting in December that it was the confidence in the economic outlook that made the Fed accelerate Taper. The hawks, that is, moderate and tough, can be said to be the main style of this Fed.

ps: Market expectations for rate hikes are reflected in CME's Fed Funds futures.

In the chart below, the level of GDP growth is relatively normal, and there are no signs of overheating in the economy, considering that people may have become dependent on the Fed's injection into the market Stimulus, the main problem at present is to eliminate the "dependence" brought about by the excessive subsidies of the policy since the epidemic. Coupled with the large-scale infrastructure policies of the Bai and other governments, a relatively low-interest environment is needed to reduce the government's debt repayment pressure. If a smooth taper is the Fed's goal, maintaining the size of the balance sheet through reinvestment of a certain percentage of Treasuries and MBS maturing income may be one of the options. That is, easing is still provided, but the easing is not expanded, so as to achieve the effect of a moderate interest rate increase.

US GDP Growth

Data source: TradingEconomics, 2016.1.1-2021.12

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For the market, apart from tapering bond purchases and raising interest rates, the biggest uncertainty is the Fed's view of its balance sheet. The Fed has stated that it will not begin to shrink its balance sheet until interest rates are normalized, so the market generally believes that the shrinkage will occur later in the rate hike cycle. Goldman Sachs predicts that, in addition to the three interest rate hikes in 2022, the fourth rate hike may be in the first half of 2023, and the balance sheet reduction may also begin at that time. And this time is just in the middle and late period of the halving of Bitcoin production (usually the trough of the bear market cycle). With the release of the Fed news, it may form long-term pressure on the price of BTC. The Fed's eventual shrinking of its balance sheet can sometimes have a bigger impact on markets than raising rates. Because the Fed has purchased too many assets, from $4.1 trillion in January 2020 to $8.7 trillion now.

3. Uncertainty risk

However, with economic indicators and policy factors and Can not confirm the trend, there are still some uncertain factors. Two points are discussed here:

- Epidemic

- Supervision

The epidemic will bring about a series of chain reactions such as employment problems→supply chain→commodity prices→economic expectations→monetary policy. For example, the announcement of the South African variant of the new crown on 11.26 caused panic, global stock markets plummeted, and Bitcoin immediately fell by 8%. The prices of safe-haven assets, such as U.S. bonds, Japanese yen, and Swiss francs, rose significantly. It can be seen that the market has a strong consensus on the bearish effect of the rebound of the epidemic on risky assets. With the emergence of prevention and control, vaccines and even possible special drugs, it is believed that the impact of the epidemic in 2022 will not be too great.

In terms of policy, after May 19, a series of policies to crack down on virtual currency mining were introduced, and the computing power plummeted, causing panic.

Data source: OKLink chain master

The policy pressure in 2022 may mainly come from the US supervision of USDT, USDC and other USD stablecoins, or on-chain USD. The market value of USDT plus USDC accounts for about 8% of the total market value of Bitcoin and Ethereum, which is already a considerable scale. We said earlier that Bitcoin can store value, but it cannot be a hedge. The real safe-haven asset in Crypto is only the US dollar on the chain, and it is also the channel for most investors to enter or exit the Crypto market. Therefore, the regulatory issue of such a large-scale safe-haven asset should be considered in the policy risk next year.

In summary, market indicators (inflation and US debt) reflect the current situation of the economy and market expectations, and fiscal and monetary policies hope to adjust market parameters Guiding the direction of the market, the epidemic and regulation constitute market uncertainty risks, which together affect the judgment and sentiment of the market, and the asset positioning of BTC determines how this judgment or sentiment views it.

4. BTC asset positioning

Gold price index/BTC price ( log, blue) vs US Treasury 10-year yield (green)

Data source: TradingView, 2014.4-2021.12

It is not difficult to see that the two curves basically present A more obvious negative correlation trend. That is, long-term interest rates strengthen, market risk appetite increases, and the more gold that can be bought per unit BTC, that is, the relative appreciation of BTC; in a smaller range (such as the blue area), long-term interest rates weaken, and risk aversion takes the majority Dominant, gold appreciates against Bitcoin.

We usually say that Bitcoin is scarce, and the category of value storage may only be applicable in a small range, such as the status of BTC in the Crypto market. In other words, the scarcity attribute of Bitcoin has not really gone out of the circle.

Compared with gold, Bitcoin is more anti-inflation, and both of them also have value preservation properties, but Bitcoin is not a safe-haven asset, but more risky Attributes. As can be seen from the figure below, the volatility of Bitcoin is highly correlated with stocks, and the volatility trends are also highly similar.

BTC price (blue) vs NASDAQ index (orange) vs Tesla stock price (green)

Data source: TradingView, 2020.10-2021.12

Note: The rise and fall of BTC can anchor at least one of NASDAQ or Tesla

BVOL (Bitcoin historical price fluctuation Index, blue) vs VIX (S&P 500 Volatility Index, yellow)

Data source: TradingView, 2020.1-2021.12

To sum up, we are in the picture below Position the four assets mentioned above. Gold and treasury bonds are safe-haven assets (the left side of the vertical axis), and their risk appetite is low, but gold is relatively pro-inflation, which means that sometimes there is a certain correlation between the trend of BTC and gold; Bitcoin and stocks are risky assets (the right side of the vertical axis side), depends on the improvement of the economy and the rise of inflation, and Bitcoin is more sensitive to inflation than stocks.

It should be noted that in the long run, the strengthening of the economy and the expansion of inflation are good for BTC. But in the short term, it may also bring negative factors to the policy.

For example, before the release of CPI (Consumer Price Index) data on December 10, U.S. bond yields (nominal interest rates) and breakeven inflation rates (inflation expectations) Both continue to rise, indicating that the market has given higher inflation expectations, enhancing the tapering (Taper) and early interest rate hike expectations. Tapering bond purchases and raising the federal funds rate are both monetary policies. It was the bad news that the interest rate hike was expected to be priced in. After the FOMC meeting of the Federal Reserve on December 15, it brought a wave of rise.

If Crypto is regarded as a hedging asset for inflation risk in 2021, it will be favored by funds. Then in 2022, the property of hedging inflation will be relatively weakened, and the property of risk assets will be strengthened.

As far as next year is concerned, the current interest rate hike expectations have peaked, and the future direction is likely to fall, waiting for further confirmation of the non-agricultural employment report. In the long-term interest rate hike expectations, the market needs time to digest, so that it is possible not to panic when the interest rate hike comes.

The following is the release date of some of the indicators mentioned above in 2022. There may be a risk of changing the market at key time points, so please take it yourself.

2022 Overseas Macroeconomic Calendar

Third, internal indicators - consensus within the circle

In terms of internal factors, we mainly split the indicator system from the fundamentals and the transaction layer, which can be divided into on-chain data indicators and off-chain data indicators. There is a lot of information that can be interpreted. In this article, we only select some representative interpretations. More comprehensive indicator interpretations will appear in future articles.

1. BTC Fundamentals

Pricing factors

There are three main factors in the pricing of Bitcoin: cost, network value and scarcity, corresponding to three pricing Idea:

- Compared with "cost pricing method", it considers the cost of mining, which is the shutdown price of major computing power pools that we often hear. It is the cost price relative to each computing power equipment;

- network value Model, used to measure the activity of the network, measured by the price of Bitcoin, the number of users on the chain, the transaction volume on the chain, etc., the most commonly used is the NVT model;

- Scarcity quantization model, Stock-to-Flow (S2F). The model evaluates and compares precious metal assets such as gold, and believes that the intrinsic value of Bitcoin is built by scarcity. But S2F seems to have lost its focus at the end of 21, let's briefly analyze:

S2F is a Bitcoin price prediction model given by PlanB, an encryption researcher from the Netherlands, in 20 years: Judging from the two production halvings in 2012 and 2016, the price of BTC follows the scarcity. After the price bubble, it returned to fluctuate around its S2F price.

The S2F model is a quantification of scarcity. It should be noted that it gives a value regression line, which is neither a bottom support nor an extreme high point. However, as BTC is traded and deployed as an asset, and macro factors come into play more and more, scarcity should not be the only point of obsession. For example, this time PlanB predicted that Bitcoin would hit the $100,000 mark by the end of 2021, but it did not materialize. The crazy rise that a bull market should have has not occurred. The reason is probably that ordinary people do not have good expectations for the economy, and there is no surplus food to pull the market, and the sentiment of retail investors has not been fully activated.

Therefore, it is necessary to combine changes in the external economic cycle to judge the time point of value return.

Bitcoin Stock/Flow ratio (gray) vs Bitcoin inflation rate (blue) vs BTC price (yellow)
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Data Source: woobull.com, 2010-2021

Adopted

In addition to the core scarcity, whether it can be adopted by more people and then circulated is also a compulsory course for currency. According to data from Chainalysis, Crypto's global adoption index (Adoption Index) in 2021 has increased by 7 times compared with last year, and emerging markets (Southeast Asian countries) have the most prominent acceptance of Bitcoin.

Crypto Global Adoption Indicator Trend

Geographic Distribution of Crypto Acceptance

Image source: Chainalysis

2. Transaction layer: big environment Under the market microstructure of intrinsic value recognition: revealing "class position"

Retail (0.001-0.1 BTC) 

Middle class (100-1k BTC) 

Giant Whale (1k-10k BTC) 

Super giant whale (10k-100k BTC)

Because users with different net worth have different influence on the market and professionalism, they have different information and sensitivity to the cycle, which in turn has different reference significance for us to predict bull and bear different.

1) Retail

Balance 0.001- 0.01 BTC address holdings vs balance 0.01-0.1 BTC address holdings vs BTC price

Data source: OKLink, 2016.1-2021.12

The picture above, 2016 1 From January to December 2021, two bulls and bears have been crossed, and the fluctuation of the number of coins held by retail investors basically follows the law of the currency price, and the reduction of holdings lags behind the decline of the currency price, which is of little reference value.

2) Super Giant Whale

Balance >10 BTC address holdings vs balance>10000 BTC addresses vs BTC price

Data source: OKLink, 2016.1-2021.12< /img">

It can be seen that the BTC super whales do not seem to be concerned about the bull-bear cycle So sensitive, or there is no strong consensus on where the price is headed. Before the bull market peaked in 18 years, there was a trend of reducing holdings, but the overall increase in holdings at high points is somewhat incomprehensible. The withdrawal time is earlier in this cycle, and there is currently no signal of price prediction observed from the behavior of super giant whales.

3) Middle class

Balance 100- 1k BTC address holdings vs balance>100 BTC addresses vs BTC price

Data source: OKLink, 2016.1-2021.12

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In the bull-bear cycle before and after the BTC price peaked in 2018, we can see that those who belong to the "middle class" hold 100-1000 BTC Addresses began to reduce their holdings before the peak of the bull market. However, they continued to reduce holdings at the bottom of the bear market, and there was no consensus on the bottom of the market. After the start of the 20-year bull market, it was relatively "behindsight", and it only started to break out in February 21. In general, the middle class as a whole has a slightly stronger judgment on the cycle than retail investors, but it is not very meaningful to judge the bull-bear cycle.

February 21>The number of 100 addresses and the number of BTC held by the middle class diverge, indicating that the giant whales with higher net worth may start to start from the >1000BTC evacuated from the echelon.

4) Giant Whale

Balance 1k -10k BTC address holdings vs balance>1k BTC addresses vs BTC price

Data from: OKLink, 2016.1-2021.12

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Because addresses with larger balances have lower appetite for risk, the time to reduce holdings is earlier, which is what we saw in 2017 and 21, when giant whales reduced their positions earlier than the middle class. At the bottom of the bear market 18 years later, when giant whales and middle-class stocks continued to sell off, they continued to accumulate money. In February 21, they began to reduce their holdings. Before 519, there was another wave of holding reductions "coincidentally". It can be seen that the giant whale's judgment on the bottom is very firm and consistent, and the top shipment is very smart, which belongs to the Smart Money of this cycle.

In the 2020-2021 rising cycle, 1k-10k BTC giant whales are the backbone of this round of rising, and they have predicted the top in advance, 100-1k BTC will be relayed in the mid-term, and retail investors will contribute the final strength to the top. In summary, 1k-10kBTC giant whales are more sensitive to the bull-bear cycle, and have obvious cycle prediction value.

Market sentiment: Are you smart money?

The Four Stages of a Market Cycle

The chart above depicts the different stages of the bubble in the market cycle, which reflects the entry crowd and market sentiment at different stages. Not many people are talking about it during the Stealth Phase, and smart money is accumulating low-priced chips. As prices start to "take off", institutional investors see market opportunities and gradually enter the market. After gaining the attention of the media and the public, driven by FOMO sentiment, a large amount of retail funds entered the market, early investors or giant whales began to withdraw steadily, and the bubble entered the final stage of "mania". After the withdrawal of the last batch of smart money funds, market buying could hardly support the selling pressure, and the bubble burst.

The social volume (Social Volume) in the figure below counts the number of times Bitcoin-related feature lexicons appear in various social media (Telegram, Reddit, etc.), Positive Sentiment reflects the opinion (optimistic/negative) of "Bitcoin" in the network. We can judge the different phases of the price cycle based on market sentiment. Of course, there are other indicators that reflect market sentiment, such as the panic/greed index.

Bitcoin Social Volume (Blue) vs Bitcoin Positive Sentiment (Purple) vs Bitcoin Price (Green)
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data Source: Santiment, 2019.12-2021.12

Supply and demand relationship: stock exchange How much

Exchange address BTC balance vs BTC price

Data source: OKLink Master, 2020.5-2021.12

In the figure, the BTC balance of the exchange address and the BTC price are negatively correlated most of the time. The reason is that as the price rises, investors are bullish in the medium term and will transfer the BTC in the exchange out of the cold wallet. On the contrary, when investors are bearish, they will exchange their low-priced chips into US dollars, cash out and leave the market. That is to say, we often say that exchanges have transferred in a large amount, forming short-term selling pressure.

A similar indicator is ASOL. ASOL compares the cost of each UXTO with the "lifetime" of the UTXO from the last transaction to the time of the transaction, and then calculates the average lifespan (days) within a certain period of time. In other words, ASOL can reflect the trends of "old-money" and "new-money" as a whole during this period. If ASOL is high, it means that long-term currency holders start trading, which is usually a precursor to market changes.

ASOL vs BTC price

Data source: OKLink, 2019.2-2021.12

Although we only listed a few sporadic indicators among the many on-chain indicators, in general, what the transaction layer reflects is the degree of recognition of intrinsic value under the general environment trend, and the transaction behavior under the trend and expectation exposed. Regardless of whether it is on-chain or off-chain, at the transaction level, we want to see the market expectations of investors with different characteristics from the behavior and sentiment of the market, and make more certain trend judgments.

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In 2021, driven by ample global liquidity and anti-inflation demand, market risk appetite is relatively strong High, cryptocurrencies have benefited a lot from it.

In the medium and long term, given the size of Bitcoin's market value, it is difficult to really get out of its own independent market. It will definitely be affected by the market's expectations of the economic environment and the overall sentiment, and the asset positioning of BTC determines how this judgment or sentiment views it. The expected and actual interest rate hike rate, as well as the trend of the inflation rate will determine the consensus outside the circle of Bitcoin’s risk asset attributes and inflation hedging attributes next year.

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Returning to Bitcoin itself, we hope that the intrinsic value of Bitcoin, such as decentralization and scarcity, can be affirmed inside and outside the circle. And pay attention to the entry and exit signals released by the trading layer, and draw your own cycle judgment from the behavior and sentiment of the market.

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