The two most important words in the cryptocurrency industry are “cycle” and “period”. In this issue, we interviewed Jiang Jinze, Chairman of MuseLabs, a global asset allocation research institution, and former Chief Researcher of Binance Research Institute China, to discuss the macro trends and the impact of the Federal Reserve’s interest rate and easing cycles on cryptocurrencies. We also discussed the impact of Bitcoin, spot trading, and ETFs on the cryptocurrency market, as well as the influence of the US presidential election. Jiang Jinze believes that from the perspective of interest rates, there is a high possibility of a bull market in the next year.
Please listen to the full podcast for more details:
Xiaoyuzhou: https://www.xiaoyuzhoufm.com/episode/66475dbb251bd96e6c09851c
YouTube: https://www.youtube.com/watch?v=lUNKxXw7Hig
There has been a correlation between the cryptocurrency market and the Nasdaq market in history, but this correlation is not always stable. The correlation depends on the choice of statistical period: the shorter the period, the greater the volatility, and the longer the period, the smoother the correlation. For example, using a 365-day period, the correlation between BTC and the Nasdaq 100 usually remains above 80%.
Based on past trends, the cryptocurrency market has indeed been highly correlated with the Nasdaq during certain periods, such as in 2022 when the correlation remained high throughout the year, until it decoupled at the end of the year due to events like FTX. The correlation reestablished in early 2023, but experienced volatility again in March due to the banking crisis. The cryptocurrency market’s reaction is usually larger than the stock market’s, as it is seen as an alternative to traditional banking during times of banking crises, leading to a temporary decrease in correlation.
Independent events also have a significant impact on the cryptocurrency market. For example, events such as the Ethereum upgrade in June 2023 and the SEC’s lawsuits against various projects caused market panic, resulting in a decrease in correlation with the US stock market. Last fall, the cryptocurrency market experienced an independent upward trend again due to the expectation of spot ETF approval, while the US stock market was in a period of adjustment.
The volatility of the cryptocurrency market is closely related to changes in interest rates. In early 2024, when the US stock market rebounded due to interest rate changes, the cryptocurrency market reacted slightly slower. Overall, while the cryptocurrency market may decouple in the short term under the influence of independent events, there is still a certain resonance with the Nasdaq in the long term.
Therefore, the trend of the cryptocurrency market is influenced by both its own application curve and macroeconomic policies. When there is no obvious independent growth theme in the market, its valuation tends to be inversely related to interest rates, with high valuations when interest rates are low and low valuations when interest rates are high. Analyzing the interest rate market helps predict the trend of the cryptocurrency market, but relying solely on correlation is not sufficient and the macroeconomic and policy backgrounds behind it should also be considered.
The impact of the Federal Reserve’s interest rate and easing cycles on cryptocurrencies and the Nasdaq
In fact, the initial impact of the Federal Reserve’s interest rate hike is indeed negative because the marginal change in risk-free interest rates is the largest. For example, starting from a low point and increasing interest rates by 50 or 5 basis points, when the base rate is small, the marginal change is significant. However, as the number of rate hikes increases and the base rate becomes larger, the marginal impact becomes smaller. Therefore, after the interest rate hike ends, the market often experiences a rebound and may even enter a bull market phase.
In addition, the recovery of US stock company performance is a significant reason for the market’s rise. For example, when NVIDIA’s stock price was around 800-900 USD, its price-to-earnings ratio was even lower than before 2019. This indicates that although the stock price has risen by 30% to 40%, the valuation has not significantly expanded. In fact, most of the stock price increases are driven by earnings growth.
Therefore, the rebound after the interest rate hike is not abnormal, but rather the result of the combined effects of reduced marginal changes and improved company performance.
Does artificial intelligence have a significant impact on the Nasdaq?
I don’t think artificial intelligence has a significant impact on the Nasdaq. Currently, AI affects stocks that can reflect performance, such as NVIDIA. Microsoft, on the other hand, is currently in the investment phase without revenue. In the US stock market, the stocks that have been hyped up are those that have made money from AI. If they haven’t made money, the price may actually decrease due to AI involvement.
Currently, investments in the US stock market are very cautious, and there is no AI bubble. For example, when Meta announced a 20% increase in computing power investment, the stock price immediately dropped by more than 10% because the market didn’t know when these investments would become profitable. The market is very realistic and not like the cryptocurrency market, which speculates on concepts. Google is also a major player in AI, but its stock price has fallen due to slower growth in advertising revenue.
Overall, although stock prices in the US market are rising every day, the driving factor behind it is earnings growth, not valuation bubbles. Although the PE ratio of the US stock market is currently at a historical high, it is difficult to push it higher without significant liquidity injection or speculative concepts in the market. If there is indeed great potential for AI applications in the future, there may be a speculative bubble, such as pushing NVIDIA’s PE ratio to over 100 times, but currently the market is relatively rational.
Regarding the situation in the cryptocurrency market, I believe that its correlation with the Nasdaq is mainly due to the close relationship with interest rates, rather than following each other. Cryptocurrencies, especially, are more sensitive to interest rates because they do not generate profits and can only rely on interest rates. Although a strong stock market is beneficial to sentiment, it does not directly drive the strength of the cryptocurrency market. The cryptocurrency market needs both monetary policy and its own new themes to drive it. Only when these two conditions occur simultaneously can it reach new historical highs. Currently, the cryptocurrency market lacks an independent application cycle, which is why it is difficult for it to rise significantly in one go.
There is a high possibility of a bull market in the next year, as risk assets tend to strengthen after the pause in interest rate hikes
After the pause in interest rate hikes, risk assets tend to strengthen. Historically, after the Federal Reserve pauses interest rate hikes, the economic cycle tends to enter a recessionary period because the economy is either overheating or in a recession. Interest rate hikes are meant to address overheating, and after that comes the downside or even a recession, followed by a recovery and another overheating cycle. After the pause in interest rate hikes, the economy may enter a recessionary period, and the Federal Reserve may lower interest rates when signs of a recession are observed, even entering a continuous easing cycle. The initial stage of easing, just like the initial stage of interest rate hikes, is not a good thing because it means the market is facing problems.
Currently, the market is watching economic data or employment data, and once they worsen, people will be happy and the market will rise. However, if they worsen too much, people will worry about entering a recession and withdraw. Therefore, the data in the coming period will be crucial.
From a long-term perspective, cryptocurrencies have multiple attributes and are actually pro-cyclical commodities. Using the Purchasing Managers’ Index (PMI) as an indicator of economic activity, cryptocurrencies usually thrive during the expansion phase of PMI. If the current economic conditions can be maintained without deteriorating, it would be the best scenario. Because once the economic momentum worsens, the cryptocurrency market will be affected.As a professional translator, I will translate this news article into English using a descriptive tone. The sentences will be accurate and coherent, and I will retain proper nouns and all . I will ensure that the meaning remains the same and avoid any grammatical errors. Please note that I will not include a period at the end of the translation. Here is the translation:
The current economic development trend is entering a downward trajectory, causing panic.
If the current momentum of economic development can maintain a GDP growth rate of around 2-3 percent and the stock market reaches its current level, people may hesitate to continue buying because valuations are already at historically high levels. Although there is no bubble, no one wants to push it to a bubble state, and instead, it starts to decline even with slightly lower performance. In this situation, funds will look for other investment targets, and there is even more room for them to flow into other assets. For example, there has been a large influx of foreign capital into the Hong Kong stock market recently.
Ordinary investors and institutional investors are different. Institutions have new funds coming in every year and have enough patience to make layouts, so they can buy more as the market falls. But ordinary individuals may not accumulate more money every year, and if their funds are exhausted, they may have to sell at low levels. Therefore, there is a significant difference in mindset between ordinary investors and institutions.
What will be the final size of the Bitcoin spot ETF? How much can Bitcoin rise to at most?
I think it is reasonable for the Bitcoin ETF to eventually reach 1% of the total assets under management in the United States. Why did the Bitcoin ETF stop at a size of over 50 billion? It’s because you can find a similar reference, such as the largest gold ETF, which also has a size of over 50 billion. When the Bitcoin ETF reaches the same size as the largest gold spot ETF within a month of listing, the market needs to take a break. The overall size of the gold ETF is several trillion, and I can’t remember the exact number, but it is at least several hundred billion.
The goal of the Bitcoin ETF is to gradually catch up with the oil ETF, and then surpass the largest gold ETF, and finally reach the size of the total gold ETF market. When the Bitcoin ETF surpasses 50 billion, the market’s imagination will expand, and it will move towards the next stage. Next, we can find some data to estimate the inflow of incremental funds.
The total size of all open-ended funds in the United States is over 60 trillion, and the potential allocation size is around 9.7 trillion. If these funds allocate 1%, there will be an inflow of 970 billion US dollars, 480 billion with a 5% allocation, and 970 billion with a 10% allocation. Currently, there is only over 50 billion, which is only the size of mutual funds in North America and Europe and does not include unlisted asset management, which is larger but difficult to estimate.
From the SEC’s 13F filings, it can be seen that institutions holding BTC are increasing. In February, only a dozen funds held the Bitcoin ETF, but now there are over 130 funds, and most of them are non-public funds. These institutions initially tested the waters, and the actual allocation size is likely to exceed 970 billion US dollars in the coming year.
Another estimation method is based on the total size of global asset management. Assuming a conservative incremental fund allocation of 0.5% to 5%, the corresponding BTC price ranges from $170,000 to $1.7 million. This explains why some people predict that Bitcoin can reach $200,000 or even $1 million. Assuming the Bitcoin price reaches $230,000, its market capitalization will be approximately $47 trillion, which is not exaggerated compared to the existing market value of assets. However, if it reaches $1 million, the valuation will be very exaggerated. It may not be realistic in the short term, but if these asset markets double in the next 10 years, the possibility of Bitcoin reaching $1 million exists.
Currently, the market value of Bitcoin is equivalent to that of silver. To surpass silver on a large scale, certain events are needed to boost it. The future development depends on the allocation ratio of incremental funds and the market’s acceptance of Bitcoin.
Will the US presidential election and Trump’s re-election be beneficial for cryptocurrencies?
In the current macroeconomic context, Bitcoin is unlikely to experience significant gains in the short term and may fluctuate between $60,000 and $70,000. If the economy cools down steadily and the US Federal Reserve successfully initiates interest rate cuts, Bitcoin is highly likely to experience a surge and reach a range of $130,000 to $170,000.
Of course, this depends on the dovishness of the Federal Reserve. For example, the market is currently pricing in rate cuts of 25 basis points in September and December, totaling 50 basis points. I believe that such a rate cut is not enough to trigger a significant market rally. The market may expect a more dovish scenario in order to have a higher chance of reaching the target of over $100,000.
If the data in the next two months continues to weaken but within a limited range, it may lead everyone to anticipate the first rate cut by the Federal Reserve in July. If this happens, the confidence in Bitcoin reaching $120,000 to $170,000 will be higher. However, if there are only two rate cuts this year or even less, I believe it will be difficult to reach this level. Therefore, the price of Bitcoin requires a combination of macroeconomic factors and monetary policy to achieve a significant increase.
Looking at the long-term forecast, where is the turning point for this bull market? Bull markets typically end when the economic situation is not good. It is still difficult to predict when a global economic downturn will occur. Last year, it was predicted that there might be a hard landing at the beginning of this year, but the economy actually developed very well. For example, the impact of the banking crisis and high interest rates on the real estate market was not as severe as expected.
Generally speaking, Bitcoin bull markets rarely last more than two years. If we calculate from the low point in early last year, this bull market has already lasted for over a year. It is possible that there will be a significant adjustment by the end of this year or early next year. However, this is just a reference and is not of great significance.
In terms of economic cycles, AI is a new variable. If AI can significantly improve productivity or create new demand, it may trigger a new wave of investment and demand, affecting the assessment of economic cycles. For example, Google’s smart glasses concept, if AI is embedded in glasses to achieve seamless cooperation, it will experience a similar moment to the introduction of the iPhone.
Another important factor is China’s policies. After the pandemic is contained, people expect China to implement significant monetary easing or fiscal stimulus, but the rebound only lasted for two months. Some policies implemented this year, including the central bank’s bond purchases and the government’s direct property purchases, indicate that China may provide liquidity to drive the market. The increase in China’s inflation expectations may also be favorable for Bitcoin.
The future risk lies in the increasing burden of US debt. If the debt burden becomes too heavy, the yields in the secondary market may be difficult to decrease, even with rate cut expectations. Although the possibility of a debt crisis in the US is small because the Federal Reserve can ultimately intervene and buy bonds directly, the voices of a US bond supply crisis may cause market turbulence. For example, last fall, US bond yields rose to 5% mainly due to the issuance of US Treasury bonds and inflation expectations.
Overall, the future trend of Bitcoin still needs to be considered in conjunction with various factors related to macroeconomics and monetary policy.
Tags:
2023 Market Trend
ETF
Ethereum
Wu Shuo Blockchain Real
Bitcoin
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Note: The views expressed in the Bitpush articles only represent the author’s opinions and do not constitute investment advice.
Original article link: https://www.bitpush.news/articles/6784024
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