Bitcoin bull market is expected to extend as Fed's dovish policy stimulates rapid rise

Wang Yongfei

On March 18, Jerome Powell, Chairman of the Federal Reserve (hereinafter referred to as the Fed), said at a press conference that the Fed expects to maintain loose monetary policy to promote economic development affected by the coronavirus, and emphasized that interest rates will remain close to zero until at least 2023.

Affected by the previous US government's $1.9 trillion stimulus plan, the market expects that global economic hyperinflation may occur, which may force the Federal Reserve to take early action to raise interest rates. It is worth noting that the market's expectations for inflation have soared to the highest level in 12 years, and the Federal Reserve also expects the inflation rate to exceed 2% in 2021. However, the Federal Reserve still expressed patience with the economic warming and did not expect to raise interest rates in the next two years. This press conference also injected a dose of tranquilizer into the market.

The dovish monetary policy stance has created favorable conditions for the rise in Bitcoin prices. Alan, chief researcher of Binance China Blockchain Research Institute, told a researcher at the China Times Financial Research Institute that if the interest rate hike comes ahead of schedule, a large amount of funds from traditional institutions and retail investors may divert some of their funds back to banks to buy more stable products such as regular financial management, and there will be a certain degree of outflow of funds from the cryptocurrency market such as Bitcoin. On the contrary, the news that there will be no interest rate hike in the next two years has created a good environment for the inflow of funds into the cryptocurrency market. The shift from the depreciating fiat currency to assets such as Bitcoin will bring benefits to the investment market in the past year.

Bitcoin’s anti-inflation characteristics are magnified

Although the Federal Reserve said it does not expect to raise interest rates in the next two years, Greg Jensen, co-chief investment officer of the world's largest hedge fund Bridgewater Associates, recently signaled to the market that the global economy may usher in a round of hyperinflation. The Biden administration's fiscal stimulus measures will raise consumer prices and threaten the rise of the bond and stock markets after the crisis. The market is not overreacting to inflation, and the actual changes in economic conditions and inflation will exceed the expectations of the market or the Federal Reserve.

Jiang Jinze, head of research and strategy at Onchain and a researcher at the China Times Financial Research Institute, said that the Fed raised its medium- and short-term economic outlook in its early morning meeting today and maintained a dovish stance on monetary policy, trying to appease the market and once again stimulated the animal spirits of the market. If the purchase of government bonds is reduced, yields may quickly get out of control as the largest long-term buyers leave the market. Therefore, according to the statements of various Fed officials, investors do not need to worry about the Fed's withdrawal from loose policies at least before the fall. The withdrawal of support for the market will definitely bring shocks to the economy and financial markets.

Today, the price of Bitcoin has stabilized above $58,000. Bitcoin is currently recognized as a tool to hedge inflation, and a dovish monetary policy stance is expected to promote another rapid rise in Bitcoin prices. A Mizuho Securities survey shows that it is estimated that nearly $40 billion of the US $1.9 trillion stimulus plan will flow into the Bitcoin and bond markets.

In this regard, Alan emphasized that the US government recently signed the hotly debated $1.9 trillion rescue bill, which also includes a $1,400 payment plan for citizens. The US government's continuous monetary easing policy has caused most retail investors to abandon holding depreciating fiat currencies and turn to assets such as Bitcoin, which will bring benefits to the investment market in the past year. If there is a continuous influx of funds into Bitcoin, it will maintain and prolong the bull market of this round of the market and bring more user traffic; it is undoubtedly good for the price of Bitcoin.

It is worth noting that despite the recent sharp rise in US bonds, Jensen believes that the ability to use bonds for diversified investment has deteriorated significantly, and the ability to use bonds to obtain returns has obviously declined, despite the rising risk of inflation. The employment policy that is favorable to workers and the increasingly slowing globalization mean that technological progress is the only force to curb inflation. Fiscal and monetary policy makers may provide more financial support until the limit is reached.

Bitcoin is more of a "pro-cyclical" commodity

Morgan Stanley's wealth management department released a research report on the 17th saying that the "threshold" for cryptocurrencies to become an investable asset class is being reached. The viability of cryptocurrencies as a qualified financial investment option was only consolidated during the COVID-19 pandemic in 2020.

As we all know, Bitcoin has both the risk-averse properties of digital gold and the risk-taking properties of commodities. The market focuses on different things at different times, which also leads to a very low long-term correlation between Bitcoin and traditional major asset classes. However, empirical data analysis shows that Bitcoin is relatively more like a "pro-cyclical" commodity, that is, it will be sought after by investors when the economy accelerates expansion or expectations are good, Jiang Jinze analyzed.

According to Coin Metrics, a cryptocurrency data company, the price of Bitcoin has doubled this year, but there is still room for the rally to continue. Bitcoin fell nearly 20% from its all-time high of $60,000 last week, causing the MVRV ratio to fall to 0.88. "Historically, the best time to invest in BTC is when the MVRV falls below 1.0." Coin Metrics said that the MVRV indicator reached its peak in 2018 before the bear market began, and reached nearly 6 points in 2014.

The MVRV ratio indicates the difference between the current price of a cryptocurrency and the average price at which Bitcoin is acquired. Generally speaking, when prices reach their limit, traders may tend to take profits, which creates selling pressure and the price goes down.

Recently, the negative premiums of Grayscale GBTC and ETHE have also attracted industry attention, but the negative premiums are continuing to narrow. On the 17th, the premiums of GBTC and ETHE were -4.35% and -3.52%, respectively. Today, the negative premiums of GBTC and ETHE have narrowed again, to -1.91% and 0.60%, respectively. Alan believes that the recent negative premiums of Grayscale GBTC and ETHE are mainly due to the increase in interest rates in the former US bond market. Users have withdrawn funds from the OTC market and transferred them to the low-risk and stable US bond market, thus forming a certain selling pressure on risk targets such as GBTC and ETHE, causing prices to continue to fall or even negative premiums.

(The author is a researcher at the China Times Financial Research Institute)

Editor-in-charge: Meng Junlian Editor-in-chief: Ran Xuedong