Three reasons why the “eternal bull market” does not hold true (Part 2)

Wu Shuo Author | Liu Quankai

Editor of this issue | Colin Wu

The eternal bull market has the element of "topic speculation", but whether it can be sustained until the next round of halving is worth discussing. The fact that the institutional effect has not yet formed a significant external expansion effect is the core reason why the eternal bull market is not established.

In the above, we listed several factors that have led to the eternal bull market in the current market: the magic of DeFi, institutional power, and compliance trends, which have played an important role in promoting the introduction of funds. This article will continue to focus on three consensus views on the eternal bull market and make some negative reflections.

Here, let’s review the consensus view on the eternal bull market:

① After the halving in 2020, the inflation rate of Bitcoin will be lower than that of the US dollar for a long time. In theory, the exchange rate of Bitcoin against the US dollar will continue to rise for a long time;

② The price of Bitcoin continues to rise until the next halving, and so on;

③ Similar to the structural bull market of the U.S. stock market, the index of the top asset portfolio is always on an upward trend.

This inflation is not that inflation

According to qkl123 data, after the halving in 2020, the inflation rate of Bitcoin remained at [1.41%, 2.53%], and the inflation rate on March 31 was 2.09%; according to trading economics data, the US inflation rate in March was 2.6%, a month-on-month increase of 52.94%.

If we simply look at the size of the numbers, since the halving, the inflation rate of Bitcoin has been close to the US inflation rate most of the time; if we do simple linear thinking, after the next halving or continuous "flooding", the inflation rate of Bitcoin will be much lower than the US inflation rate.

But in fact, these two indicators have essential differences in theoretical definitions.

BTC-Inflation Ration = Daily circulation increase × 365 days ÷ yesterday's circulation. The inflation rate generally refers to not simply the ratio of the over-issued part of the currency to the actual circulation demand, but is based on the country's price index and is calculated by calculating the average increase in prices. Therefore, BTC-IR is the ratio of the increase in Bitcoin (i.e. the over-issued part) to the existing Bitcoin stock; and the so-called US dollar inflation rate is actually the inflation rate at the US national level, i.e. the rate of price change. Such a comparison does not make much sense.

If we ignore this price change rate and delve into the "dollar inflation rate" (i.e. the ratio of the increase in the issuance of dollars to the existing stock of dollars), it is also difficult, because there is actually no exact number for how much the dollar has been issued. However, considering the loose monetary policy of the United States - unlimited QE, the "dollar inflation rate" must be much higher than the national inflation rate of the United States.

From this point of view, BTC-IR will indeed be higher than the "US dollar inflation rate" for a long time. But can this really further deduce that Bitcoin has entered a "perpetual bull market"? In the above, we have analyzed that the rise in market prices requires a lot of funds to promote it. Behind the "US dollar inflation rate" is the excessive issuance of US dollars. So how much impact will the excessive issuance have on the cryptocurrency market? The key is to see how much of the newly issued US dollars actually flow into this emerging market.

By understanding where the additional funds issued by the Federal Reserve go, we can better judge the logic behind the impact on the cryptocurrency market.

(1) A large amount of funds flowed into negative-yielding assets, and the scale of global negative-interest rate bonds remained high

(Data source: Bloomberg, Soochow Securities)

According to data from Bloomberg cited by Soochow Securities, since the beginning of 2021, global negative interest rate bond funds have been in an outflow stage, and the market size has been on a downward trend, but it still exceeds 12 trillion US dollars, which is at a historical high. According to CoinMarketCap data, the market value of the cryptocurrency market is only 2 trillion US dollars. If the funds flowing out of the negative interest rate bond market flow into the cryptocurrency market, it will have a huge impact on this emerging market. Therefore, the outflow trend of funds in the negative interest rate bond market deserves further attention.

(2) Funds may flow into the U.S. stock and real estate markets first

Soochow Securities pointed out that although global housing prices have hit record highs in recent years, the global and US housing price-to-income ratio and global and US housing price-to-rent ratio still have room for imagination, so it is believed that although the global real estate market value is large, there is still room for growth. According to TBIC's forecast, the global real estate market value is expected to grow by 3.2% in 2021, reaching US$277 trillion.

In addition, by comparing the S&P 500 Dynamic Earnings Yield Index and the 10-year US Treasury bond rate, it is found that the current S&P 500 Dynamic Earnings Yield Index is 4.4%, while the 10-year US Treasury bond rate is only 1.7%. Therefore, compared with US Treasury bonds, US stocks are obviously more attractive.

In any case, through tracking this round of bull market, we can find that there is indeed new capital inflow and capital outflow from other markets, but this amount is still insignificant compared with the amount flowing into the stock market and real estate market.

The institutional effect has not expanded externally, and it may be difficult to support the next round of halving

In the above, the author made a simple classification of institutional phenomena: Grayscale GBTC, listed companies led by Tesla, and Bitcoin ETF, and mentioned the positive impact of their entry. However, we found that the positive effects brought about by the entry of institutional funds did not seem to expand effectively and attract more institutions to enter.

Last year, since Grayscale announced its purchase of Bitcoin, every rise in Bitcoin has been inseparable from Grayscale's "buy, buy, buy". Investors excitedly called it the "Grayscale effect". At that time, the first thing I did when I woke up every day was to see how many Bitcoins Grayscale bought last night. However, after Grayscale announced the suspension of new funds entering the market, it stopped increasing its holdings of Bitcoin, the Grayscale effect gradually faded, and GBTC continued to show a negative premium.

Then the wave of listed companies buying Bitcoin gradually came, and the most iconic one was Tesla's Musk's public call to buy Bitcoin. At that time, we naively believed that the entry of listed companies like Tesla would undoubtedly play a good demonstration role and lead more institutions to buy Bitcoin. Tesla's first purchase of Bitcoin was in early February. We waited for nearly two months, but only received a poor financial report, which was obviously very different from what we expected from heavyweight companies such as Facebook and Apple.

Of course, two days ago, Nexon, South Korea's largest gaming giant, bought $100 million worth of Bitcoin at an average price of $58,226, which still makes us happy. However, at the same time, Musk, as a new believer in the cryptocurrency circle, sold some Bitcoin on the grounds of proving the liquidity of Bitcoin as a cash substitute on the balance sheet. Although the news did not have a negative impact on the market when it came out, it made us rethink the significance of Tesla's purchase, but it was just an investment behavior of buying high and selling low with a relatively large amount of funds. Although Tesla's CFO said that he believed in the long-term value of Bitcoin and would continue to invest in Bitcoin, who can guarantee that he would buy at such a high position, or wait until a huge correction or even a bear market before buying? For other heavyweight companies, the timing of entry is also a necessary issue to consider.

On February 18, the world's first Bitcoin ETF (Purpose Bitcoin ETF) was officially listed on the Toronto Stock Exchange in Canada. According to the official website of Purpose investments, as of April 28, the fund issuer Purpose has held 18,825.7338 Bitcoins, with a fund size of $129 million.

(Data source: Trading View)

However, according to the data from Trading View charts, the daily trading volume peaked upon listing and then continued to shrink. From 9.652 million on the first day of listing to 1.185 million on April 28, the trading volume dropped by 87.72%, which reflects the sharp cooling of investors' enthusiasm. In addition, I think the significance of ETF listing is more for institutions than for ordinary investors, but it seems that no traditional funds have included it as an asset allocation portfolio. Of course, the historical significance of Purpose Bitcoin ETF as the first Bitcoin ETF is unquestionable, but perhaps due to the narrow market in Canada, its influence seems to be limited. The real heavyweight ones must be ETFs issued in the US trading market, but due to the strong supervision of the SEC, this day does not seem to come so soon.

There is no significant structural phenomenon in the market

The structural bull market of the US stock market, or the index bull market, has lasted for 12 years. It means that the index of the top asset portfolio has been in an upward trend for a long period of time, such as the index composed of the five leading technology stocks of FAANG, while most other stocks are in a state of stagflation. So, can such a structural bull market also be formed in the cryptocurrency market? The author believes that this situation will not happen for the time being.

(1) The iteration speed of top underlying assets is fast

As of now, the cryptocurrency market is still too young. Apart from Bitcoin and Ethereum, it will take time to test whether other targets can become one of the giants in the market.

The above picture shows the top 15 cryptocurrencies on April 26, 2020, and the picture below shows the data on April 26, 2021. If we combine the top 15 cryptocurrencies into an index on April 26 last year, we will find that nearly half of the cryptocurrencies have been replaced by other currencies one year later. If you want to become the leader of the entire market or industry, you must first survive for a long time, and secondly, you must have a reason not to be replaced.

If the stocks in the index are not stable enough, the index’s significance will be greatly reduced. In the cryptocurrency market, the speed of replacement and substitution is too fast. At present, it is difficult to form a carnival circle composed of a few leading stocks.

(2) Bitcoin’s influence is too great

As the biggest player in the cryptocurrency market, Bitcoin's every move will have a significant impact on other currencies.

(Data source: qkl123)

According to qkl123 data, the current market value of Bitcoin accounts for about 48.07%, which has reached a low point in just two years. Despite the decline, Bitcoin's influence on the entire cryptocurrency market is still huge. Therefore, we often see that if the price of Bitcoin falls, it will lead the entire market to fall collectively. Therefore, at present, compared with the carnival of the top asset targets, it is simpler and more realistic for Bitcoin to dance alone.

(3) Small currencies have greater explosive power

Since the beginning of the year, Bitcoin has increased by 85.36% and Ethereum has increased by 274.52%. If these two figures were in the stock market, they would be surprising enough, but for small-cap currencies, the increase is negligible.

(Data source: Screener)

According to Screener data, among the top ten currencies with the highest growth since the beginning of the year, the highest return rate reached 28421.56% and the lowest reached 5125.61%. Their investment returns far exceeded those of Bitcoin and Ethereum.

Of course, such a comparison is not very meaningful, because some of these currencies are more likely to be manipulated by the market makers. Then let's take a look at two representative indices for small and medium-sized market capitalization currencies produced by the professional index team ChaiNext: CSI6-20 (the sample consists of 15 tokens ranked 6-20 in terms of size and liquidity) and CSI21-100 (the sample consists of 80 tokens ranked 21-100 in terms of size and liquidity).

According to qkl123 data, from the beginning of the year to date, the investment return rate of CSI6-20 is 462.44%, and the investment return rate of CSI21-100 is 651.56%, both exceeding Bitcoin and Ethereum. This is enough to show that the investment return rate of the altcoin index composed of different scales and liquidity combinations can exceed the increase of the two "big brothers".

Therefore, the so-called structural bull market is self-defeating. The rise of the market and the breakthrough of the cycle are inseparable from the promotion of funds. The institutional effect has not yet formed a significant external expansion effect, and the funds in the market are always limited within a certain period of time. It seems that the eternal bull market of Bitcoin is still far away from us. However, we should also see some conditions that have been met, which make us full of hope for the fantasy of the eternal bull market.

Reference articles:

https://pdf.dfcfw.com/pdf/H3_AP202104061481404354_1.pdf?1617702846000.pdf

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