The story behind the crypto market bull run

Original title: "As global central banks continue to flood Bitcoin with money, will there be a big bubble?"

Original source: Economic Observer

Bitcoin (BTC), which has no currency attributes, no legal status equivalent to currency, and cannot be circulated and used in the market in China, has frequently attracted the attention of the Chinese people in the past half month: multiple news about Bitcoin prices breaking historical records have become hot searches on Weibo; On December 17, 2020, the day after Bitcoin prices hit a historical high of US$20,000, a chief analyst at CICC posted on WeChat Moments, lamenting that "only Moutai and Bitcoin can resist inflation."

People who have been paying attention to the cryptocurrency circle for a long time have a consensus - the price of virtual cryptocurrencies represented by Bitcoin fluctuates constantly, and a sharp drop can be the prelude to a bright future, while a sharp rise can also be the prelude to a sharp fall. However, the fact that the price has been able to maintain a high of $20,000 for half a month has made people in the circle smell something different. On December 29, 2020, Xie Jinbin, a blockchain technology entrepreneur with 7 years of virtual currency investment history, talked to a reporter from the Economic Observer about the reasons behind this round of Bitcoin's rise and said:

“I think the players behind Bitcoin have changed now, and are now mainly Wall Street institutions.”

What forces have driven this round of Bitcoin's rise? How sustainable is this round of growth? Does this mean that virtual cryptocurrencies that have been rejected and banned by countries including China have transformed into digital assets with real investment value?

Prices hit record highs

Data from Coindesk shows that the growth momentum of Bitcoin prices has been quite obvious in the past half month. On December 16, 2020, the price of Bitcoin reached a high of $20,000 for the first time; on December 17, it exceeded $23,000; on December 20, it exceeded $24,000; on December 27, it exceeded $27,000; and on December 30, it exceeded $28,000.

Bitcoin was created in 2009, but its price was not generated until 2010. The initial price of Bitcoin was about $0.0025. Compared with the high price of $28,400 on December 30, 2020, the value of Bitcoin has increased by more than 11.2 million times in 10 years.

According to Coindesk data, on the evening of December 30, 2020, the market value of Bitcoin has exceeded US$524.5 billion, which is roughly equivalent to the market value of 1.5 Kweichow Moutai (600519.SH), accounting for more than 70% of the global virtual cryptocurrency market value.

Yu Jianing, rotating chairman of the Blockchain Committee of the China Communications Industry Association and president of Huobi University, told the Economic Observer that since the birth of Bitcoin, the price has been volatile, and has generally experienced two major ups and downs. The first was in November 2013, when the price of Bitcoin reached nearly $1,000, but it fell all the way in September 2015, falling to a minimum of $200; the other was in March 2017, when the price of Bitcoin exceeded the price of one ounce of gold for the first time, and hit a historical high of $19,875 in December of that year, and then entered a trough period of nearly three years, with the price as low as $3,000 at the end of 2018.

Xie Jinbin experienced the highs and lows of Bitcoin that Yu Jianing mentioned. In 2013, Xie Jinbin was a junior student majoring in communication engineering. He read a lot of technology articles and was interested in blockchain and Bitcoin. He joined the Bitcoin community. Out of curiosity about technology, he wanted to participate in mining coins. However, he was short of money and his computer configuration was too low-end during his student days, so he couldn't mine coins. So he bought 0.3 Bitcoins through Bitcoin China. The price of one Bitcoin was about 900 yuan. This was Xie Jinbin's first time buying Bitcoin, and also his first time buying virtual encrypted coins.

Xie Jinbin told the Economic Observer that he did not intend to sell all his bitcoins at the time, but in 2015, the price of bitcoin fell and he lost his position, leaving him with no bitcoins. After graduation, in addition to starting a business in blockchain technology, Xie Jinbin also invested in virtual cryptocurrencies. He currently has Ethereum and USDC (an open source crypto stablecoin whose value is pegged to the US dollar). According to him, he has made money from investing in virtual cryptocurrencies since 2013.

But he didn’t catch up with the positive effects of this round of Bitcoin rally:

“I have been holding Ethereum, thinking that Ethereum has more room for growth, but I didn’t expect Bitcoin to rise so well. It’s still a matter of judgment.”

As for how much Chinese investors can benefit from this round of Bitcoin rally, Xie Jinbin is unable to give an exact judgment. He believes that China has the world's three largest mining machine giants and the largest number of miners. There must be many Chinese who have participated in the buying and selling of Bitcoin, but there are probably not many Chinese who still hold Bitcoin:

“Many people don’t have any bitcoins left. Those who say they have a lot are talking nonsense. They should have sold them a long time ago.”

Xie Jinbin speculated that in this round of Bitcoin rally, when the value of Bitcoin reaches $18,000 or $20,000, individual investors who have Bitcoin in their hands should hurry up to sell it. He told the Economic Observer reporter that if he had Bitcoin in his hands, he would definitely sell part of it first to control his position: "I can't have the last laugh." Xie Jinbin emphasized that this was the lesson he learned from investing in virtual cryptocurrencies since 2013.

As for the rumors in the market that "many Chinese people in the cryptocurrency circle have been liquidated recently due to shorting Bitcoin," Xie Jinbin believes that this situation is very likely to exist: "In 2018 and 2019, Bitcoin had small periods of growth, but eventually fell back." The implication is that the current round of Bitcoin price increases can repeatedly refresh historical price records, which is quite unexpected.

Yu Jianing also told the Economic Observer reporter:

“Some digital asset investors are relatively lagging behind in their understanding of the overall blockchain thinking and believe that history will simply repeat itself and that Bitcoin will have difficulty surpassing its historical high in 2017. As a result, they liquidate their positions in advance or reverse long and short positions, resulting in significant losses.”

Institutional strength highlighted

When asked by our reporter whether the recent rise was a big bubble, Xie Jinbin was silent for a while and then replied: "I think the players behind Bitcoin have changed now, and are now mainly Wall Street institutions. It is not easy to simply say whether it is a bubble or not."

Xie Jinbin believes that the current Bitcoin price game is different from when he first came into contact with Bitcoin. Most of the participants in the early Bitcoin trading market were individual investors. Some of them were believers in technology and planned to hold them for a long time without selling them. Their capital pool was small, so it was easy to be controlled. It was not uncommon for Bitcoin prices to be smashed or raised, but now Bitcoin has become a "financial tool to fight inflation" for Wall Street institutions.

Talking about the reasons for this round of growth, Yu Jianing summarized three points to the Economic Observer reporter. First, under the influence of the epidemic, global central banks have flooded the market with money, which has increased investors' demand for assets to fight inflation. "In order to stabilize the market and the economy, the fiscal stimulus of central banks in various countries is unprecedented. Both houses of the U.S. Congress passed the latest round of stimulus plans with a scale of US$900 billion. Since the outbreak of the epidemic, the U.S. government has launched three rounds of fiscal stimulus plans totaling about US$3 trillion. Under this loose monetary policy, global inflation expectations have risen, and the market demand for anti-inflation assets has increased significantly." Yu Jianing explained.

As for why Bitcoin is chosen by investors as one of the tools to fight inflation, Xu Weihong, chief economist of Yongxing Securities, recently publicly explained:

“The economic cycle, market cycle, inventory cycle, sudden epidemics and other real economic conditions have little to do with the trading price of Bitcoin. At most, they are related to the amount of money in the market.”

It should be pointed out that unlike some virtual currencies with unlimited supply, Bitcoin is scarce like gold and is set at a total of 21 million. As the number of Bitcoins produced increases, the difficulty of mining Bitcoins increases. 2020 is the third halving of Bitcoin production, and the reward for mining a block has been reduced from 12.5 Bitcoins to 6.25. According to CoinMarketCap data, as of the evening of December 30, 2020, the global supply of Bitcoins has exceeded 18.58 million.

Yu Jianing's second reason is similar to Xie Jinbin's:

“Bitcoin and other blockchain digital assets have gained widespread attention from mainstream investment institutions and are beginning to accelerate their integration with the mainstream financial system.”

Yu Jianing cited the example that Fidelity Investments, a global leading fund company, released a report in October 2020 recommending that investors hold 5% of their portfolio in Bitcoin; PayPal, an online payment giant with more than 300 million users, purchased a large amount of Bitcoin and announced in November 2020 that it would provide Bitcoin trading services to eligible US customers; Singapore's DBS Bank launched Bitcoin and other digital asset trading services for institutional investors; MicroStrategy, a US listed company and business intelligence software provider, officially included Bitcoin investment as one of its businesses and currently holds more than $1.1 billion in Bitcoin; Grayscale Trust, a well-known digital asset trust institution, has a total digital asset management scale of nearly $20 billion. "These examples represent fundamental changes in the digital asset market," Yu Jianing emphasized.

In China, as early as 2013, the People's Bank of China, the Ministry of Industry and Information Technology, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission jointly issued a notice on preventing Bitcoin risks, clearly stating that "Bitcoin should be a specific virtual commodity, does not have the same legal status as currency, cannot and should not be circulated and used as currency in the market", and "financial institutions and payment institutions are not allowed to conduct Bitcoin-related business." The Chinese government's regulatory measures on Bitcoin are quite strict and prohibitive, but the US government's regulation of virtual encrypted currencies is relatively loose.

In February 2020, a paper published in the journal New Finance pointed out that in the spot market of cryptocurrencies in the United States, more than 1,600 digital tokens are being traded. For Bitcoin, the most influential virtual cryptocurrency, the United States has formed an on- and off-exchange Bitcoin derivatives market, such as Bitcoin futures and Bitcoin options.

As for Grayscale, which is quite familiar to people in the currency circle, blockchain media Golden Finance once introduced that the prototype of Grayscale was a Bitcoin investment fund. It became an independent company in 2014. Because it is relatively troublesome for institutional users to directly purchase virtual cryptocurrencies in terms of compliance, and the transfer and storage of virtual cryptocurrencies is also a technical job, Grayscale has launched trust funds for virtual mainstream currencies such as BTC, BCH (Bitcoin Cash), ETH (Ethereum), and LTC (Litecoin). Purchasing trust funds can indirectly participate in the investment of virtual cryptocurrencies. The specific practice is that after Grayscale receives the payment from the customer, it converts it into the designated cryptocurrency at the market price and then issues equivalent trust shares.

At present, Grayscale's trust products do not support the redemption of virtual cryptocurrencies. According to Golden Finance, as of the first half of 2020, Grayscale has held more than 400,000 bitcoins. Investors who want to exit can sell trust shares in the secondary market, and Grayscale earns handling fees and management fees. Some people believe that the existence of Grayscale has locked up a lot of bitcoins, further strengthening the scarcity of bitcoins, and investors can still participate in bitcoin investment without actually holding bitcoins. People in financial institutions are really "geniuses."

Yu Jianing believes that the third reason is related to the implementation of blockchain technology:

"The global digital economy is accelerating, and the evolution and innovative application of blockchain technology are also accelerating. In particular, new formats such as blockchain-based DeFi (distributed finance), encrypted collectibles, and blockchain games are developing rapidly, accelerating the empowerment of industries. The demand for blockchain infrastructure will directly drive the demand for corresponding digital assets, and then drive up asset prices. Bitcoin is a 'general equivalent' among digital assets, similar to the blue chip in the digital asset market. The expected increase in demand for blockchain platforms and digital assets will be reflected in the price of Bitcoin in a leading manner."

Sustainability of the rally

As of the morning of December 31, 2020, before this reporter published this article, the price of Bitcoin hit another high of $29,200. Xie Jinbin and Yu Jianing are both optimistic about this round of Bitcoin price rise. Xie Jinbin told the Economic Observer reporter: "It should not be as exaggerated as some people say. I think it is possible to rise to $1 million or $50,000."

Xie Jinbin also teased those individual investors who still hold Bitcoin, saying that no matter how much the market rises, they will not be able to make a profit. Only by cashing out at a high price can they make a profit. "Don't expect to eat the fish from the beginning to the end. It's good enough to eat the middle." He believes that even Wall Street institutions cannot inject funds into Bitcoin investment for a long time. The price will definitely fall back. The key is whether the low point can still maintain $20,000 when it falls back.

Yu Jianing believes that the current market value of Bitcoin at $500 billion will not be a threshold, as it is still far from the global gold market value of $10 trillion. However, if Bitcoin is really highly financialized and becomes a digital asset, it will most likely not be able to escape the cyclical law. If it rises, it will fall, and if it falls, it will rise.

Yu Jianing advises Bitcoin investors that if they judge that they have entered a bull market, they should enjoy the value-added brought by the bull market and not trade frequently. Any market is a "slow bull and fast bear". In a bull market, prices will rise over a long period of time. Frequent trading will miss the best investment opportunities. Leverage should also be avoided in a bull market. The premise of investment profit is to effectively control risks and avoid passive "getting off the train".

"The current price of Bitcoin is relatively high, and there has not been a 20%-30% correction in this round, so it is important to do a good job of risk control." Yu Jianing said, "It is not recommended to use the working capital of life or business for investment."