312 One Year Anniversary: ​​Big Changes in the Crypto World

312 One Year Anniversary: ​​Big Changes in the Crypto World

2020 is a special year, and March 2020 is a "Black March" that will go down in history. Even Warren Buffett, the stock god, exclaimed that he had "lived a long time". In a sense, March 2020 is a very important watershed in the great changes in the global economy and finance. Against the backdrop of the global financial system being almost "out of control", Bitcoin has led DeFi to emerge as a dark horse, triggering a competition in the financial system of "centralization and decentralization" and "deconstruction and reconstruction".

March 12th is another most representative day in the “Black March”. On this day last year, the Dow Jones closed down 9.99%, the largest single-day drop since October 1987. The Dow, Nasdaq, and S&P 500 all fell into a technical bear market; Bitcoin plummeted 38.81% from around $8,000, and fell to a low of $3,858 the next day.

In the blink of an eye, the "312" of 2021 is approaching, and in this short one year, the crypto world has undergone major changes. Will history spiral upward in "rhyme"? Do coin holders need to be wary of black swan risks again? Are the fundamentals of crypto finance different? This article will review and sort out the important changes in the crypto market in the past year, reveal the deep reasons that drive its development and rise, and try to answer these three questions.

Bitcoin under macro changes

In 2020, the global financial market witnessed many "unprecedented" events: In early February 2020, the COVID-19 pandemic broke out globally. On March 2, the Federal Reserve urgently cut interest rates by 50 basis points, and then the world ushered in a "wave of interest rate cuts" by central banks; on March 6, OPEC and Russia broke down their cooperation on production cuts, and Saudi Arabia launched an oil price war. Coupled with the impact of the epidemic, international crude oil futures prices plummeted to negative values, and for a while "a barrel was more expensive than oil"; the U.S. stock market fell four times in two weeks, and Buffett couldn't help but sigh, "I'm 89 years old, and I haven't seen such a scene"; affected by the plunge in U.S. stocks, dozens of countries around the world issued bans on short selling...

Bitcoin even reversed during this period. Bitcoin first experienced the "312 crash", and its price was halved in two days. On March 23, the Federal Reserve launched a wide-ranging unlimited quantitative easing initiative on the basis of its earlier $700 billion bond purchase plan. Subsequently, Bitcoin and global assets began to gradually stabilize and rebound, and even set new highs one after another. The figure below shows the trend of Bitcoin's price increase in 2020 and the major events related to it. Readers can clearly see the relationship between Bitcoin prices and "news" in the figure.

Grayscale fourth quarter financial report data

Entering the new year, the world economy seems to be still in the haze of 2020. Although vaccines have been gradually promoted, the virus strains continue to mutate, and there is still no sign of the COVID-19 pandemic being completely contained. It will still take some time for the world economy to recover. On March 7, 2021, the U.S. Senate passed an amendment to the $1.9 trillion COVID-19 relief bill, and a round of money injection is about to come. Federal Reserve Chairman Powell also recently made a "hands-off" statement: the Fed will not raise interest rates until the 2% inflation target is achieved and full employment is restored.

Since the moment the Federal Reserve began to release money, the stock market has no longer been a barometer of the economy, but a barometer of liquidity. Looking at global financial assets, there are bubbles everywhere. With such a flood of money, we will undoubtedly usher in the rise of various new assets. Data from the crypto research platform Glassnode in April 2020 showed that against the backdrop of unprecedented inflation and loose global monetary policy, the number of new investors pouring into the Bitcoin market has grown parabolically. If this is inferred, Bitcoin's performance is still worth looking forward to under the $1.9 trillion flood of money in the United States in 2021.

Glassnode Data

Turning the timeline back to January 3, 2009, Satoshi Nakamoto wrote in the Bitcoin Genesis block: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks (On January 3, 2009, the Chancellor of the Exchequer was on the verge of implementing a second round of emergency aid for banks)".

On March 7, 2021, the U.S. Senate passed an amendment to the $1.9 trillion COVID-19 relief bill, and the House of Representatives will vote this week. Thomas Jefferson, one of the three founding fathers of the United States, once said: "In every country that issues paper money, it is subject to abuse, and has been, is, and will always be abused." Against the backdrop of the macro-financial system becoming increasingly mired in the quagmire, deflationary assets such as Bitcoin are becoming more and more popular. Perhaps when many asset bubbles burst, Bitcoin may become a safe haven.

Bitcoin vs. Gold

Bitcoin was called "digital gold" a long time ago, but at that time, BTC was still difficult to compare with gold. Before August 2020, the correlation between Bitcoin's trend and gold was relatively strong, but since then, Bitcoin and gold seem to have started a competition.

BTC is making great strides upward, while gold is falling all the way. After breaking through $2,000 in August 2020, the price of gold has been falling all the way, and the current price of gold remains around $1,700. In August 2020, BTC reached a high of $12,448, and then Bitcoin continued to rise sharply after a brief adjustment. Currently, BTC has once again reached $50,000, and its market value has exceeded $1 trillion.

According to the latest report from Goldman Sachs, as of March 4, 2021, Bitcoin's return this year is about 70%, which is about twice the 35% return of the energy industry, which is closely followed. In addition, the report chart shows that so far this year, Bitcoin has outperformed all major traditional asset classes.

Goldman Sachs report data

The key to the divergence of gold and Bitcoin is that institutional investors began to reduce their holdings of gold and increase their holdings of Bitcoin. Grayscale managed assets of $2 billion at the beginning of the year and $20.2 billion at the end of 2020. The buyers of Grayscale's trust products are mainly crypto asset lending companies, hedge funds, mutual funds, private wealth companies, consulting firms, family offices, etc.

Grayscale fourth quarter financial report data

On November 9, 2020, JPMorgan Chase pointed out in a report that Bitcoin is eroding the market demand for gold ETFs. Institutional investors such as family offices view Bitcoin as a digital substitute for gold, and their demand for Grayscale's Bitcoin Trust exceeds the total demand for all gold ETFs.

JPMorgan Chase report data

Bloomberg released its March report "Bloomberg Crypto Outlook", in which Bloomberg believes that in 2020, Bitcoin volatility continued to decline, while the volatility of most other assets increased. As we enter 2021, we don't see anything that can stop Bitcoin from replacing "conservative" gold. It may only be a matter of time before Bitcoin replaces gold. The following figure is a comparison of the volatility of the Gold-Bitcoin Index and the S&P 500 Index:

Bloomberg Intelligence data

Bloomberg Intelligence analysis shows that the 260-day volatility of the Gold-Bitcoin 75/25 Index has reached its lowest level, and is 20% lower than the same risk measure of the S&P 500 Index, which was similar to the situation in early 2016. Generally speaking, the 260-day correlation indicator between Bitcoin and the stock market is usually negative, but it reached 0.34 in early March, which is the highest value so far. As the Federal Reserve launches monetary quantitative easing policies to boost GDP, the price of the Gold-Bitcoin Index is expected to receive more lasting support.

Will Bitcoin eventually replace gold? Gold has existed for thousands of years, and its historical status in traditional society is indeed unshakable. However, human society is undergoing a major Internet migration, and humans are entering the digital age. In fact, many of our lifestyles have begun to migrate to the Internet. New technologies such as artificial intelligence, the Internet of Things, cloud computing, and blockchain are developing rapidly and are rapidly reshaping society. In this process, big data has become a new means of production for humans, and decentralized collaboration is changing the original production relations and methods of humans. Bitcoin, as a native asset in the digital age, is naturally more suitable for serving as a value reserve than gold. In the development of decentralized finance (DeFi), BTC naturally plays the role of a value reserve. The following figure shows the changes in the locked-up amount of BTC in DeFi:

Oklink Data

In the development of DeFi, BTC is closely linked to it. As blockchain technology matures, BTC will also be applied to more scenarios, thereby strengthening its value reserve function. As BTC volatility increases, it will be recognized by more institutions and even countries. Grayscale pointed out in its fourth quarter report of 2020: The latest guidance from the Office of the Comptroller of the Currency (OCC) indicates that US banks may consider incorporating digital currencies into their settlement infrastructure. In 2021, we may see the beginning of the integration of digital currencies into the national banking infrastructure.

The rise of DeFi has impacted the existing financial system

Blockchain technology is most closely connected to the financial sector. Bitshare in 2014 and MakerDAO in 2017 were both early DeFi explorers; however, before 2020, the development of DeFi was indeed very slow. It was not until 2020 that DeFi saw a big explosion.

To be more specific, until March 2020, DeFi was not favored by the mainstream crypto market; at that time, the halving of Bitcoin every four years was the focus of more people's attention. But after the "312" crash, the global financial market and economic fundamentals "derailed", the market had great concerns about the financial field, financial innovation became a new outlet, and DeFi ushered in a rare period of development opportunities.

We believe that after the 2020 "312" crash, the development of DeFi can be roughly divided into four periods:

DeBank Data

1. DeFi adjustment period (roughly from March to April). The crypto market crash disrupted the original rhythm of DeFi development. During this period, some leading DeFi players entered an adjustment period and basically recovered to the level before the crash. The representative one is the leading oracle LINK.

2. DeFi innovation and growth period (mainly from May to August). There are many financial innovations in the DeFi field, which promotes the rapid growth of DeFi. In mid-April, Compound, the leader in decentralized lending, launched the governance token COMP. Lenders and borrowers can obtain governance tokens by providing lending assets and borrowing assets. This innovation greatly stimulated the enthusiasm of the market to participate and introduced a large amount of idle funds to DeFi. At the same time, the decentralized trading platform Uniswap emerged. The [Constant Product] model it adopted allows users to directly exchange tokens in the exchange pool, changing the previous order book trading model, lowering the threshold for market making, and further providing application scenarios for funds in Compound (trading and earning market making fees, etc.). Subsequently, the financial management platform Yearn.finance came out of nowhere. It used the machine gun pool and other functions developed by smart contracts to allow users to further maximize profits with idle funds. These three leading companies initially built the infrastructure template of DeFi, and then more projects expanded and developed on this basis, and the DeFi ecosystem prospered.

3. DeFi de-bubble period (roughly from September to November). Before DeFi, there were many financial models such as mining coins and trading mining, but most of them entered a death spiral due to a large number of speculators arbitrage and dumping after a short period of prosperity. The same is true for DeFi in this stage, and most of the DeFi leaders have plummeted. It is worth mentioning that the amount of DeFi locked positions did not decrease significantly during this period. In addition, the DeFi leaders began to bottom out and prices stabilized.

4. DeFi outbreak period (from December). After DeFi's substantial growth driven by financial innovation, on the one hand, there is indeed a need for adjustment, and more importantly, it is limited by the bottleneck of blockchain technology. The most criticized one is that the gas fee is too high, and the advancement of Ethereum 2.0 is relatively slow. However, in December 2020, the Layer 2 solution became the life-saving straw to save DeFi. For example, Loopring, one of the leading Layer 2 projects, became another Google cooperation project after Chainlink and Hashgraph, and became the first zkRollup application case recommended by Google. Loopring's decentralized trading protocol based on zkRollup has increased throughput by 1,000 times while ensuring security, and reduced costs by hundreds of times. The progress of this type of technical solution has brought great confidence to the market. Subsequently, projects such as Synthetix and Sushi announced their entry into Layer2, and the DeFi+Rollup solution has become a market hope and a hot spot. At the same time, the expansion of public chains Cardano, Near, Solona, ​​and cross-chain leader Polkadot have also made efforts to rekindle market hope. DeFi has begun to advance towards CeFi from the two dimensions of financial innovation and technological innovation, and is constantly gaining ground.

The above picture shows the top ten currencies in the current crypto market. Among the top ten currencies, UNI and LINK are DeFi leaders; ADA and Polkadot are high-performance expansion and cross-chain leaders; BSC and other platform public chains can be classified as Ethereum side chains, which mainly benefit from the overflow value of Ethereum. This also shows the important characteristics of this round of bull market from the side: DeFi's financial innovation and expansion and other technological innovations are undoubtedly the main focus of funds and the recognized development direction.

Before 2020, DeFi was not worth mentioning; after 2020, DeFi has impacted the existing financial system. In this process, the development of DeFi has also aroused the attention and concerns of governments and regulators.

On December 17, 2020, the CFTC released a primer on the cryptocurrency industry, stating that DeFi and cryptocurrency governance have become one of the topics of concern to the CFTC in the field of digital assets. Heath Tarbert, chairman of the U.S. CFTC, once bluntly stated that U.S. regulation lags behind the development of cryptocurrency and blockchain.

On the evening of January 4, 2021, the Office of the Comptroller of the Currency (OCC), the largest banking regulator in the United States, announced on its official website that U.S. banks would be allowed to use public blockchains and U.S. dollar stablecoins as settlement infrastructure in the U.S. financial system.

In January 2021, the Financial Crimes Enforcement Network (FinCEN), an agency of the U.S. Treasury Department, proposed requiring banks and money service businesses to record transactions of private cryptocurrency wallets. Since DeFi applications mainly rely on wallets as an entry point, FinCEN's move may be aimed at starting to try to regulate DeFi, etc.

The US tax season is coming. Most Americans believe that the IRS does not provide enough guidance to taxpayers on how to report their crypto income, especially reports on DeFi innovations. On March 9, 2021, the IRS launched an anti-tax fraud operation called "Operation Hidden Treasure", dedicated to tracking unreported cryptocurrency transactions to hold potential tax evaders accountable.

For regulators, DeFi has developed too fast and has greatly changed the original regulatory paradigm. In the field of DeFi, many concepts are still lacking clear definitions, such as how to define the asset attributes of its tokens, and how to tax staking income. If these definitions are still lacking, then regulation and taxation will naturally be full of problems. In addition, the characteristics of crypto assets such as high decentralization and global circulation also make regulation more difficult.

In essence, the development of DeFi was born when the global financial system was facing a crisis of collapse. The development of DeFi is the result of the mutual promotion of financial innovation and technological innovation. This is an important development direction in the digital age and a financial force that no country can ignore or block. However, how DeFi should be used by the government and how it should be regulated are urgent issues that government regulators need to face at present, and it is also the beginning of DeFi's reshaping of the traditional financial system.

Outlook

Due to the COVID-19 pandemic, people have begun to accept and adapt to a contactless or low-contact lifestyle for more than a year. Although this has caused many inconveniences, it has become a catalyst for the digitalization process and has greatly increased the speed of the digitalization process. For example, in China, even the elderly who do not know how to use smartphones have to start learning how to use smartphones to scan codes for registration. It can be said that the epidemic has made the traditional lifestyle and digital life, which were originally parallel, begin to try to merge.

Although the global economy as a whole has suffered a severe setback, industries such as artificial intelligence, 5G, the Internet of Things, and blockchain have developed rapidly. The fourth industrial revolution, with data as an important means of production, has risen rapidly, and the great migration of mankind to the Internet has never been so great. Grayscale pointed out in its report "The Great Transfer of Wealth Promotes BTC to Become a Mainstream Investment Target": The digital age has arrived, and in the next 25 years, $68 trillion of wealth will be transferred to the hands of the younger generation who tend to invest in digital currencies. This is a huge opportunity for Bitcoin.

The future has come. Even if a black swan appears again on "312", please believe that Bitcoin is no longer the same Bitcoin as before.