Three reasons why the “eternal bull market” is established (Part 1)

Wu Shuo Author | Liu Quankai

Editor of this issue | Colin Wu

The eternal bull market has the element of "topic hype", but whether it can be sustained until the next round of halving is worth discussing. The magic of DeFi, the power of institutions and compliance are the core reasons why this year's bull market is different from previous ones.

The main signs of a bull market are the generally optimistic sentiment of investors and the positive growth of asset prices, which means that the market has sufficient funds and has a money-making effect. Without considering the impairment of handling fees, the secondary market is a typical zero-sum game market. The money you make is the money lost by others. But human nature is greedy. Anyone who participates in investment speculation hopes to make a profit and continue to make a profit, so of course they hope that the bull market will continue.

Whenever the price of Bitcoin continues to rise, some investors will shout that it is an eternal bull market. The eternal bull market represents investors' desire to pursue profits. So what exactly is the so-called eternal bull market of Bitcoin? There are currently different opinions. Here are some points that are quite consistent for everyone to think about.

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.

Most of the "old hands" who have been in the market for a long time may be able to see the shortcomings of these views at a glance. However, in this article, I will not discuss the shortcomings of these three points for the time being, but analyze the conditions that may have been met to achieve a perpetual bull market and do some positive thinking.

The Magic of DeFi

In the market, there is a type of investor called the coin hoarders, who like to hoard coins to increase their value. This will cause the coins in circulation in the market to decrease continuously. On the other hand, if they do not have sufficient funds on hand, they will have to sell their coins, which reflects the problem of liquidity shortage. In the past, liquidity supplementation came from the entry of new people and new funds.

The emergence of DeFi has greatly alleviated the liquidity demand problem in the cryptocurrency circle, and a large amount of dusty assets can be used for secondary investment.

(Image source: DeBank)

TVL (total locked value) is the most important indicator for measuring the scale of DeFi project usage. Generally speaking, the higher the TVL, the better the liquidity and the better the user experience. According to DeBank data, as of April 28, 2021, the total locked value of DeFi was $99.21 billion, and the net value of locked value was $66.91 billion. These two figures have increased by more than 100 times compared to a year ago. Although this number is still insignificant, its rapid growth still leaves us with plenty of room for imagination.

The continuous growth of the total locked amount is due to the continuous innovation of DeFi and the ultra-high APY of liquidity mining. There are many ways to play liquidity mining, and the "nesting doll" model represented by the machine gun pool allows funds to be quickly stacked. In theory, this "nesting doll" model can be continuously stacked. With each additional layer of dolls, one more layer of coin (the price of the coin cannot be zero), the annualized rate will increase, and of course the risks will accumulate, but human nature is always greedy.

In addition, a professional DeFi farmer is either mining new mines or on the road to finding new mines. Because in the DeFi world, the earlier the user enters, the higher the APY will be. And latecomers are willing to come in, often attracted by high TVL and growing prices, thus forming a continuous source of funds and guaranteeing a higher APY. This is the magic of DeFi.

Institutional Strength

(Image source: https://bitcointreasuries.org/)

According to data from Bitcoin Treasuries by @NVK, as of April 28, 2021, a total of 56 companies held 1,385,907 bitcoins, accounting for 6.6% of the total supply of bitcoin. This round of bull market is also called institutional bull by many investors.

In 2020, Wall Street institutions represented by Grayscale entered the market to buy Bitcoin, and once again attracted other institutions and wealthy investors to enter the market in a compliant manner by issuing the Bitcoin Trust Fund (GBTC); in 2021, large listed companies represented by Tesla entered the market to buy Bitcoin, and their main method was to buy or sell Bitcoin through the Prime Brokerage of the US compliant exchange Coinbase; and the issuance of an increasing number of Bitcoin ETFs.

The entry of institutions not only means that they have brought in funds, but also means that institutional behavior has added an endorsement to the development of this emerging market, attracting more investors from traditional markets such as funds and stocks to begin to re-examine the significance of the existence of this market and enter the market to pursue higher profits.

Bitcoin ETFs can allow more ordinary investors to participate in cryptocurrency market transactions in the simplest way without having to consider storage and security issues. Increased liquidity and security can promote Bitcoin's integration with mainstream assets and attract more ordinary or institutional users to configure it as part of their assets.

It is precisely because of the participation and entry of these institutions that Bitcoin has attracted more attention, and its value has gradually been accepted and recognized by more people. In addition, the participation of institutions must be based on sufficient research and confident entry, which may prolong the bull market to a certain extent and drag down the price.

Compliance Trend

The healthy development of a market is inseparable from supervision. The significance of supervision is not deprivation but recognition.

As the largest compliant cryptocurrency exchange in the United States, Coinbase officially landed on the Nasdaq market on April 15, Beijing time, marking an important step towards compliance in the cryptocurrency market. On the one hand, this shows the recognition of cryptocurrency by the US government and mainstream investment; on the other hand, because of supervision and compliance, the rights and interests of users can be guaranteed, which will attract more investors to participate.

(Data source: THE BLOCK)

According to data from THE BLOCK, the number of Coinbase certified users reached 56 million in the first quarter of 2021, a year-on-year increase of 30.23%. In addition, many listed companies buy or sell Bitcoin through Coinbase, which is the benefit of compliance. It is foreseeable that in the future, local exchanges in some countries and regions with relatively complete regulatory regulations will usher in a wave of listing or listing, which will bring more new incremental funds into the market.

Whether it is DeFi, institutions or compliance factors, their important impact is inseparable from the entry of funds, which is also the fundamental reason why the bull market can continue.

Please see the next article for three reasons why the "eternal bull market" is not true.

Risk Warning

According to the "Risk Warning on Preventing Illegal Fund Raising in the Name of "Virtual Currency" and "Blockchain"" issued by the China Banking and Insurance Regulatory Commission and other five departments, readers are requested to abide by the laws and regulations of their region. The content of this article does not endorse the promotion of any business or investment activities. Investors are requested to raise their awareness of risk prevention. Wu said that the content of the blockchain is not allowed to be reproduced or copied without permission, and violators will be held accountable.