If this condition is met, the price of Bitcoin may exceed $100,000

When the COVID-19 pandemic broke out in 2020, the Federal Reserve once again launched a quantitative easing monetary policy by increasing its holdings of U.S. Treasuries and mortgage bonds, leading to a global financial dilemma of "double inflation" in the consumer and financial markets and negative returns on U.S. Treasury bonds.

As a scarce asset, Bitcoin has become a "reservoir" of financial assets to curb "double inflation" when U.S. Treasuries have negative returns. The funds from selling U.S. Treasuries have entered the Bitcoin trading market, pushing the market size of Bitcoin to over one trillion U.S. dollars. On March 11, 2021, the exchange rate between Bitcoin and the U.S. dollar surged to $57,869. According to this trend, when the U.S. Treasury yield exceeds 2.3%, that is, exceeds the inflation rate and achieves positive returns, the price of Bitcoin may exceed $100,000.

Figure 1 Bitcoin and US dollar trends (2010-2021)

Bitcoin, which was born in 2008, is a cryptocurrency that does not rely on a specific monetary institution to issue it. It is generated based on a specific algorithm through a large amount of calculations, and uses a distributed database composed of many nodes in the entire P2P network to confirm and record all transaction behaviors, and uses cryptographic design to ensure the security of all aspects of currency circulation. The decentralized nature and algorithm itself can ensure that the currency value cannot be artificially manipulated by producing a large number of bitcoins. The design based on cryptography can make Bitcoin only be transferred or paid by the real owner. This also ensures the anonymity of currency ownership and circulation transactions. The biggest difference between Bitcoin and other virtual currencies is that its total number is very limited and it has scarcity. In 2010, the exchange rate of Bitcoin to the US dollar was only US$0.1. In 2013, the return rate of Bitcoin was nearly 100 times, which was the year with the highest return rate. Since then, Bitcoin has gradually attracted people's attention. Although from a technical point of view, Bitcoin has spawned the development of blockchain technology, the trend of Bitcoin and US dollar prices is more concerned by non-IT professionals. Since 2017, the exchange rate of Bitcoin against the US dollar has rapidly soared from US$1,000 to nearly US$20,000, showing for the first time the appeal of Bitcoin as a scarce asset to financial capital.

Since September 2020, the exchange rate of Bitcoin against the US dollar has begun to soar again from the level of 10,000 US dollars. On March 11, 2021, the closing price of Bitcoin against the US dollar was 57,869 US dollars, once again setting a new historical high.

Figure 2 Bitcoin, U.S. Treasury Bonds, and Dow Jones Index (2020/1-2021-)

On February 19, 2020, the Chinese people were fighting a desperate battle against COVID-19, while the other side of the ocean was enjoying peace and prosperity. The Dow Jones closed at 29,348 points, the price of Bitcoin in US dollars gradually rose back to $9,600, the yield on 10-year US Treasury bonds was 1.56%, and Trump was dreaming of re-election as president. With the outbreak of COVID-19, on March 12, 2020, the closing price of the Dow Jones fell to 21,201 points, the price of Bitcoin against the US dollar was almost halved, and the yield on 10-year US Treasury bonds fell below 1%.

From March 12 to March 23, the Dow Jones Index and the 10-year U.S. Treasury yield were still on a downward trend, but the Bitcoin-to-U.S. dollar exchange rate had already sounded the clarion call for a counterattack, with the price of $6,469 up nearly 50% from March 12. Since September 2020, the Bitcoin-to-U.S. dollar exchange rate has been rising in tandem with the 10-year U.S. Treasury yield.

Figure 3 Correlation between Bitcoin and 10-year US Treasury yield (2020/1-2021-)

Before September 2020, the market size of Bitcoin was around $200 billion, which is two orders of magnitude smaller than the U.S. stock market and U.S. Treasury bond market. Therefore, the sensitivity and volatility to the external economic environment are also higher than those of the stock market and the U.S. Treasury bond market. Since September 2020, the exchange rate of Bitcoin to the U.S. dollar has shown a high correlation with the 10-year U.S. Treasury bond yield (Bitcoin = 56,000 * U.S. Treasury bond - 29,000). The current Bitcoin market size has expanded five times compared to September 2020, reaching a trillion-dollar market size. If this trend continues, when the U.S. Treasury bond yield exceeds 2.3%, the price of Bitcoin against the U.S. dollar may exceed $100,000.

After the outbreak of the COVID-19 pandemic, the U.S. Congress passed two rounds of nearly $3 trillion in relief funds in 2020, and the scale of new treasury bonds issued in 2020 was about $4 trillion. The Federal Reserve also once again launched a quantitative easing monetary policy and increased its holdings of about $2.3 trillion in treasury bonds. The Fed's large-scale increase in treasury bonds has caused the U.S. Treasury yield to drop sharply below the inflation rate, and the real yield on U.S. Treasury bonds is already a negative interest rate. The Fed's new round of quantitative easing has caused double inflation in the consumer and financial markets and negative returns on U.S. Treasury bonds, causing financial capital to sell off a large number of U.S. Treasury bonds. As a result, U.S. Treasury prices have fallen and U.S. Treasury yields have shown a trend of rapid rebound.

Judging from the trend of the Bitcoin-to-US dollar exchange rate and the 10-year US Treasury bond in the past six months, Bitcoin has become a reservoir for suppressing "double inflation". A large amount of funds from selling US Treasury bonds have entered the Bitcoin trading market, becoming the main driving force for pushing up Bitcoin prices. Before US Treasury bonds achieve positive returns (before US Treasury bond yields exceed the inflation rate), the motivation to sell US Treasury bonds always exists. The increase in the 10-year US Treasury bond yield will lead to an increase in the Bitcoin-to-US dollar exchange rate.

According to the resolution of the Federal Reserve's Open Market Committee released in January, the Federal Reserve will allow the inflation rate to exceed 2%. In order to stimulate the recovery of the US economy, the Federal Reserve will continue to maintain a quantitative easing monetary policy at a rate of increasing its holdings of US$80 billion in Treasury bonds and US$40 billion in mortgage bonds per month. At this rate, it is expected that the Federal Reserve will increase its holdings of US$960 billion in Treasury bonds by the end of the year.

Under the impetus of the new President Biden, the U.S. Congress has passed the third phase of bailout funds of $1.9 trillion. The U.S. federal government will sell another $1.9 trillion in treasury bonds. The new U.S. Treasury Secretary Yellen is the first female Federal Reserve Chairman in U.S. history and the predecessor of the current Federal Reserve Chairman Powell. Given this relationship, the Federal Reserve and the U.S. Treasury may have reached a consensus and tacit understanding on issues such as U.S. debt issuance, the Federal Reserve's monetary policy, and inflation rates before the U.S. Congress approved the third phase of bailout funds. According to the above information, the time when the 10-year U.S. Treasury yield turns positive is likely to be the time when the Bitcoin-to-dollar exchange rate breaks through the $10 mark.

According to historical data, 10-year US Treasury bonds had negative returns from 1975 to 1977 and from 2011 to 2013. If calculated based on time intervals, US Treasury bonds may achieve positive returns by the end of 2021, and the exchange rate between Bitcoin and the US dollar may also break through the $10 mark.

After the exchange rate of Bitcoin to the US dollar exceeded $48,000, the Bitcoin market size has exceeded $1 trillion. As a scarce resource, Bitcoin has not yet acquired the payment function of currency. As a "reservoir" of financial assets, the Bitcoin market is still a market similar to "gambling on stones". Once the price of Bitcoin to the US dollar exceeds $100,000, the Bitcoin market size will exceed $2 trillion. The entry of more and more financial capital may promote the payment function of Bitcoin. By that time, the global currency market may undergo a "revolutionary" change.