Analysis of the two important factors that created the Bitcoin bull market

Bitcoin is still soaring at the new weekend of 2021. According to Coinbase market data, at 20:00 on January 2, Beijing time, Bitcoin stood above the $30,000 mark, up more than $4,000 in 24 hours.

Review of the Bitcoin bull market in 2017 <br />Since China is a major manufacturing country and the United States is a major consumer country, the difference between China and the United States CPI is positive because China has overcapacity and has borne too much of the cost of rising raw material prices, and the profits of Chinese foreign trade companies have been under pressure. So in 2016, we saw the supply-side reform (deleting excess capacity, destocking, deleveraging, reducing costs, and filling in the gaps), followed by the rise of US inflation, and the start of interest rate hikes in 2017.

Since 2010, the interest rate differential between China and the United States has continued to rise, and capital inflows have continued to push the RMB to strengthen; while U.S. Treasury futures bottomed out at the end of 2013, yields peaked, the opportunity cost of funds declined, and market risk appetite increased. In 2013, due to China's overcapacity, the return on real investment declined (the difference between China and the United States CPI remained positive during 2010-2017), market risk appetite increased, and the high interest rate differential between China and the United States was maintained, and inflows began to be invested in virtual assets.
Starting from July 2014, China's stock market gradually rose. By January 2015, U.S. Treasury futures peaked and Treasury yields bottomed out. The opportunity cost of capital increased, risk appetite decreased, and profits were taken in China. As the money-making effect of the stock market continued to expand outward, domestic funds began to significantly increase leverage and capital flowed into the stock market. Subsequently, against the backdrop of the China Securities Regulatory Commission's investigation into capital allocation and deleveraging, A-shares began to experience a stampede-like collapse.

China's foreign exchange reserves peaked in September 2014. There are two main reasons for this: first, the U.S. Treasury yields peaked and the government bond yields bottomed out; second, the RMB was overvalued, which consumed the foreign exchange reserves (the hot money that had previously flowed in was withdrawn). The foreign exchange reserves went through the process of deleveraging and capital allocation investigation by the China Securities Regulatory Commission in 2015.
On August 11, 2015, the People's Bank of China announced the market-oriented reform of the central parity rate and improved the central parity rate quotation. It will refer to the previous day's closing price and comprehensively consider the foreign exchange supply and demand situation to finally determine the central parity rate quotation. At the same time, it announced a one-time devaluation of about 2%. Subsequently, foreign exchange reserves began to decline at an accelerated rate.

Foreign exchange reserves stabilized in December 2016, mainly because on December 30, 2016, the central bank issued the latest "Management Measures for Large and Suspicious Transactions of Financial Institutions", the biggest iteration of which is that if a user's daily transaction exceeds 50,000 RMB or 10,000 USD, it will be reported as a large transaction, while the previous minimum standard was 200,000 RMB. This updated standard was officially implemented on January 1, 2017.
At the beginning of 2017, China has strengthened its control over foreign exchange. According to the latest domestic reports, the process of exchanging RMB obtained through legal channels for foreign exchange has become more complicated, and the state has also tightened supervision on the use of foreign exchange by individuals. When purchasing foreign exchange with RMB, you must fill out the "Personal Foreign Exchange Purchase Application Form", and for the first time, it is clearly stated that foreign exchange purchases cannot be used for overseas real estate purchases, securities investment and other businesses. Foreign exchange controls have indeed effectively controlled the further reduction of foreign exchange reserves.

As shown in the above figure, when Bitcoin entered the bull market in 2017, it can be seen that the price trend slope became steeper and the growth rate became faster (the vertical axis has been taken logarithmically) starting from December 2016. Although foreign exchange reserves have stabilized and the RMB has appreciated significantly after foreign exchange controls, the core of the contradiction has not been resolved. Funds continue to flow out through other channels, and the latecomers who have increased their leverage have taken over.

China banned Bitcoin in September 2017. At that time, the People's Bank of my country decided to increase supervision of Bitcoin and began to close all virtual asset trading platforms at 12 noon on September 27. Users were required to withdraw all Bitcoins before then. Bitcoin then experienced a wave of corrections, but speculation and low-interest international hot money continued to push Bitcoin up further.

The main reasons for the rise of Bitcoin can be attributed to two categories: one is the low interest rate environment, and the other is the strengthening of cross-border capital flows.
Low interest rate environment <br />For a long time, the European and American markets have been in a period of low interest rates. Even if inflation begins, the Federal Reserve is unlikely to raise interest rates, but hawkish remarks cannot be ruled out to manage expectations. As shown in the figure below, based on the total annual fiscal deficit of the United States, it can be seen that the deficit has soared in 2020. The annual interest costs of the US government will devour a large part of the federal budget, and the greater the debt burden, the more sensitive it will be to interest rate changes, even extremely subtle changes, and it is more likely to form a crowding-out effect on private investment.
Since the outbreak of the financial crisis in 2008, the United States has experienced three rounds of QE, and did not start raising interest rates until 2017. The government deficit in 2020 is twice that of 2009, and the debt burden is much greater than in 2009. Therefore, it can be expected that there is unlikely to be an interest rate hike in the next 10 years (except for the Middle East war), and the government will continue to borrow money, part of which is used to repay interest and part of which is used to increase social welfare.

Cross-border capital flows <br />In today's era of global economic integration, low US dollar interest rates, an aging population, heavy debt burdens in consumer countries, and a huge gap between the rich and the poor have led to insufficient domestic demand and excessive hot money. For emerging markets, the main contradiction is the scarcity of foreign exchange and the large inflows and outflows of cross-border capital.
The emergence of crypto assets provides an important solution to this problem. Due to the low transaction cost, fast transaction speed, and large transaction scale of Bitcoin, capital flight has formed in some capital-dominated countries. Capital flight has a positive impact on Bitcoin, and continuous capital flight has brought continuous positive impacts to Bitcoin, which may also be the core factor of the long-term surge in Bitcoin in recent years.

Analysis of Bitcoin market trend in the future

As shown in the above figure, according to the trend chart of Bitcoin price and U.S. short-term Treasury bond futures, it can be seen that short-term U.S. Treasury bonds bottomed out in November 2018 and Bitcoin bottomed out in December 2018. The interest rate differential drives capital flows, and the increase in demand for cross-border capital flows has pushed up Bitcoin prices.
At present, the new coronavirus has broken out and spread widely around the world. Governments have been borrowing money to reduce the negative impact of the virus on the economy. The return on investment in the real economy is low. The yield on U.S. Treasury bonds has continued to remain low due to the Federal Reserve's large-scale purchases, and the interest rate spreads with various countries have continued to remain positive. These factors combined have led to a large amount of funds outflowing from the United States, a depreciation of the U.S. dollar, and rising asset prices in various countries.
The current relationship between the world and the United States is very similar to that between China and the United States in 2014 (when the U.S. Treasury yields fell and the interest rate gap with the rest of the world widened, resulting in low investment returns). Bitcoin bottomed out in 2015, began to rise in 2016, and continued to accelerate in 2017; China's foreign exchange reserves peaked in September 2014, U.S. Treasury yields bottomed out in 2015, the RMB began to depreciate, and foreign exchange reserves decreased; at the end of 2016, China began to impose foreign exchange controls, the RMB appreciated, foreign exchange reserves stabilized, and Bitcoin accelerated. In 2017, the Chinese market accounted for 80% of the Bitcoin trading market.

Summarize

As the subsequent interest rate differential begins to rise, the safe-haven property of Bitcoin will be more prominent. At present, the Bitcoin bull market precedes the gold bull market. The safe-haven property of Bitcoin comes from foreign exchange runs, while the safe-haven property of gold comes from credit hedging. In the short term, we need to pay attention to technical pullbacks. The following figure shows the trend of Bitcoin from 2015 to 2016. We need to pay attention to the sharp pullback caused by the closing of long positions after crowded trading. (NewBloc)