China-Thailand Macroeconomics: Is it safe to use Bitcoin as a configurable asset?

Main points

The demand for safe assets has increased. The unprecedented COVID-19 pandemic has had a significant impact on the global economy, which has also increased people's demand for safe assets. Judging from the situation in the United States, the epidemic has increased people's demand for precautionary savings, and the situation in my country is similar to that in the United States. From the perspective of income structure, the K-shaped recovery of the economy after the epidemic means that the proportion of wealth of high-income groups continues to increase. Against the background of rising demand for safety, the expansion of wealth of high-income groups is bound to lead to an increase in the allocation of safe assets.

Traditional assets lack a sense of security. So, what assets can provide people with a sense of security? For a long time in the past, housing has been regarded as the asset that can bring the most sense of security in my country. However, under the policy background of "housing for living, not for speculation", the recent increase in housing prices has not kept up with the level of previous years. The sense of security brought by housing as an asset has declined, and it has gradually returned to the positioning of residential attributes.

Treasury bonds are also often one of the sources of "security" in asset allocation, and the past few rounds of bull markets in the bond market are not unrelated to this. At present, my country's 10-year treasury bond yield is still at the bottom 30% percentile level. Even if there is room for price increases, the magnitude may be relatively limited. Not only has the "sense of security" brought by traditional assets in my country weakened, but overseas is no exception. The currencies of developed countries have always been regarded as important targets for overseas safe assets, but this time in order to respond to the epidemic, central banks of various countries have "opened the floodgates" and weakened the purchasing power of currencies.

What are the advantages of Bitcoin? At present, perhaps only gold and Bitcoin can meet people's demand for "sense of security" in asset allocation, and Bitcoin may have more advantages than gold. Bitcoin is not a currency in the full sense, but it is indeed an alternative asset for investment. Its current market value ranks first among digital currency assets.

First of all, the natural defects of Bitcoin as a currency are actually its advantages as an asset. Bitcoin has a natural defect of fixed supply, which means that if Bitcoin is used as a currency, it will bring deflation to the economy. However, if Bitcoin is regarded as an asset to resist the flood of liquidity, fixed and predictable supply becomes one of its advantages.

Secondly, compared with physical assets such as gold, Bitcoin in digital form is easy to carry and transfer, and has no high storage costs and is relatively private. Finally, gold has basically withdrawn from the payment circulation field, while the payment scope of Bitcoin is still expanding. From the flow of funds, we can indeed see clues that funds invested in gold may be turning to Bitcoin.

"Sense of security" is not perfect. In fact, Bitcoin is not perfect either. Its biggest disadvantage is that it faces regulatory risks. The Federal Reserve and the Treasury Department have expressed negative views on Bitcoin, and the essence of this is that they are worried about its impact on the credit of the US dollar. As far as my country is concerned, Bitcoin is unlikely to be promoted on a large scale at present, mainly because the benefits it brings to the real economy have yet to be studied.

The market has a limited market value and needs to mature. In summary, the impact of the epidemic has increased the global demand for safe assets, while the security that traditional assets can provide is weakening. Against this background, Bitcoin, as an emerging alternative asset, plays an important role in resisting economic recession and liquidity flooding.

However, it is worth noting that the Bitcoin market is still to be mature, regulatory measures are still imperfect, and the current total market value is still small, so the price is inevitably highly volatile. You need to be cautious about speculative behavior in leveraged trading.

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1. Bitcoin is the leader

Bitcoin's price increase is far ahead of others. Since 2020, Bitcoin's price increase has led all types of assets. As of April 16, 2021, the price of Bitcoin in US dollars has risen by more than 780% from the end of 2019, and more than 100% from the end of 2020. Even in the US stocks that have also seen impressive gains since the outbreak of the epidemic, such as the Nasdaq, the current increase from the end of 2019 is "only" 57%, and the increase from the end of 2020 is less than 10%, far less than the increase in Bitcoin's price.

Bitcoin prices have hit new highs. Recently, the price of Bitcoin has hit new highs. According to the closing price of Bitcoin on Bitstamp, the average closing price exceeded $20,000 per coin in December 2020, and then exceeded $30,000 per coin, $40,000 per coin, and $50,000 per coin from January to March 2021. In mid-April, the closing price of Bitcoin exceeded $60,000 per coin. Although the price has adjusted in the short term, it is still over $50,000 per coin.

It is true that the sharp rise in Bitcoin prices in the short term is related to trading sentiment, but from a medium- to long-term perspective, the formation of Bitcoin price trends is actually influenced by changes in the macro environment. As the first in a series of research reports on Bitcoin and the digital assets it represents, this article analyzes this.

2. Rising demand for safe assets

The unprecedented COVID-19 pandemic has had a significant impact on the global economy, which has also increased people's demand for safe assets.

Judging from the situation in the United States, the epidemic has made people choose to save more money rather than spend it. The seasonally adjusted proportion of personal savings to disposable income has exceeded 30%, and in February this year, this ratio was still as high as 13.6%. Excluding the epidemic period, this also set a new high since 1976.

The situation in my country is similar to that in the United States. At the end of 2020, the ratio of per capita consumption expenditure to disposable income of Chinese residents fell sharply from 70.2% at the end of 2019 to 65.9%, and in the first quarter of this year, this ratio continued to drop to 61.4%, and residents' precautionary savings demand increased significantly.

From the perspective of income structure, the K-shaped recovery of the economy after the epidemic means that the proportion of wealth of high-income groups continues to increase. Taking the United States as an example, in October 2020, the wealth share of the top 1% of American households exceeded 28%, setting a new record since the statistics were collected. my country also has a similar situation, where the growth of the median per capita disposable income of residents cannot keep up with the overall growth rate. Against the background of rising security needs, the expansion of wealth of high-income groups is bound to lead to an increase in the allocation of safe assets.

3. Traditional assets lack a sense of security

So, which assets can provide people with a sense of security?

For a long time, housing has been regarded as the asset that can bring the most "sense of security" in my country, and real estate has also become a carrier of residents' wealth. According to our estimates, in 2019, real estate accounted for more than 70% of residents' asset allocation, which is about 2.4 times the size of residents' financial assets.

However, under the current policy background of "housing for living, not for speculation", on the one hand, the central bank conducts concentration management on real estate loans issued by commercial banks, constrains the real estate industry from the financing end, and stipulates an upper limit on the proportion of bank personal housing loan balances, thereby limiting residents' behavior of leveraging to buy houses.

On the other hand, the requirement of "stabilizing housing prices" has also made the recent housing price increase far behind the level of previous years. Judging from the average price of residential samples in 100 cities, the year-on-year growth rate was as high as double digits in 2013 and 2016, and the wealth effect brought by rising housing prices was enviable. However, since 2019, this growth rate has dropped below 5%. The decline in housing price growth has also reduced the "sense of security" brought by housing as an asset, gradually returning to its original residential attribute.

In the period of economic growth slowdown and equity market adjustment, government bonds are often one of the sources of "security" in asset allocation. The past bull markets in the bond market are not unrelated to this. Although the current 10-year government bond yield in my country has risen significantly compared with the most accommodative monetary policy, it is still at the bottom 30% percentile level. Even if there is room for price increases, the range may be relatively limited, and the safety margin provided is slightly insufficient.

Not only has the "sense of security" brought by our country's traditional assets weakened, but the same is true overseas.

Currencies of developed countries have always been regarded as important targets of overseas safe assets. For example, the U.S. dollar and the Japanese yen have always enjoyed such a status among investors. However, in order to respond to the epidemic, central banks of various countries have "opened the floodgates" and the degree of currency over-issuance has significantly increased. In February 2021, the year-on-year growth rate of U.S. M2 exceeded 27%, while it was less than 10% in the same period of 2020. The growth rate of Japan's M2 also reached 9.6% in February this year, while it was only 3% in the same period of 2020. This has greatly weakened the purchasing power of currency.

4. What are the advantages of Bitcoin?

Looking at the current situation, perhaps only gold and Bitcoin can hedge against the pressure of economic shocks and currency depreciation and meet people's needs for a "sense of security" in asset allocation. In this regard, Bitcoin may have more advantages than gold.

It should be noted that although Bitcoin is called "digital currency", we believe that it is not a currency in the full sense, but it is indeed an investment option. Moreover, as an alternative investment asset, Bitcoin currently ranks first in the market value of digital currency assets. In terms of current market value, Bitcoin accounts for more than half of the market value of digital currencies, and Ethereum ranks second, accounting for more than 10%. The market value of other currencies does not exceed 5%.

First, the natural defects of Bitcoin as a currency are actually its advantages as an asset. The reason why Bitcoin is difficult to replace existing currencies is largely due to its natural defect of fixed supply. The number of Bitcoins in circulation is currently close to 19 million, and its upper limit is set at 21 million, which means that if Bitcoin is used as a currency, it will bring deflation to the economy or repeat the mistakes of the Great Depression under the gold standard.

But if Bitcoin is regarded as an asset to resist excessive liquidity, its fixed and predictable supply becomes one of its advantages over gold.

Secondly, compared with physical assets such as gold, Bitcoin in digital form is easy to carry and transfer, has no high storage costs, is relatively private, and its dependence on information networks is more in line with the habits of the new generation of investors.

Finally, gold has basically withdrawn from the payment circulation field, while the payment scope of Bitcoin is still expanding. For example, the New York State Department of Financial Services has approved 28 virtual currency-related licenses, and the list of companies supporting Bitcoin payments is also increasing, including well-known large companies such as Tesla, Microsoft and PayPal.

From the flow of funds, we can indeed see clues that funds invested in gold may be turning to Bitcoin. For example, the total assets of SPDR Gold Trust have dropped from more than US$70 billion at the end of 2020 to less than US$60 billion at present, while the total assets of GBTC Bitcoin Trust have risen from about US$17.5 billion to more than US$40 billion at present during the same period.

5. “Safety” is not perfect

In fact, Bitcoin is not perfect, and its biggest disadvantage is that it faces regulatory risks.

The Federal Reserve and the Treasury Department have both expressed negative views on Bitcoin, essentially because they are worried about its impact on the credit of the US dollar. As for my country, Bitcoin is unlikely to be widely promoted at present, mainly because its benefits to the real economy have yet to be studied. According to Zhou Xiaochuan, the former governor of the central bank, "We need to be careful and warn."

Li Bo, deputy governor of the central bank, also pointed out at the Boao Forum for Asia that the regulatory rules for Bitcoin and stablecoins are being studied. In the future, if any stablecoin hopes to become a widely used payment tool, it must be strictly regulated, just like banks or quasi-bank financial institutions. The legality of Bitcoin is not the same in different economies around the world. For example, Vietnam considers Bitcoin illegal, while the attitude of mainland my country towards Bitcoin is to restrict its use.

6. The market size is limited and the market needs to mature

In summary, the impact of the epidemic has increased the global demand for safe assets, while the security provided by traditional assets is weakening. Against this background, Bitcoin, as an emerging alternative asset, plays an important role in resisting economic recession and liquidity overflow, so its price has been rising all the way.

However, it is worth noting that the Bitcoin market is still to be mature, regulatory measures are still imperfect, and the current total market value is still small, less than 2% of the US stock market and only about 4% of the size of US Treasury bonds. The number of participants is relatively limited, so the price is inevitably highly volatile. Be cautious about speculative behavior in leveraged trading.