This group of bulls are still buying crazily. Has the Bitcoin bull market just begun?

Source: Jinshi Data

On Wednesday night, Bitcoin set a new record - reaching the $20,000 mark.

After three years, Bitcoin ushered in another bull market.

For a while, the cryptocurrency circle was in a frenzy, and cryptocurrency investors exclaimed that they had witnessed a miracle. Binance and Coinbase exchanges experienced downtime due to the sudden surge in trading volume.

In this cryptocurrency carnival, institutional investors have made a fortune, while Bitcoin shorts have suffered heavy losses.

The data on the liquidation of cryptocurrencies across the entire network showed that as of 9:16, the liquidation volume in the past hour reached 773 million yuan, and the liquidation volume in the past 24 hours reached 4.485 billion US dollars.

After setting a record high, institutional bullish voices are getting louder and louder. Where will Bitcoin go?

Bitcoin outperforms traditional assets

Since its birth in 2009, Bitcoin and other cryptocurrency assets have been controversial. After Bitcoin broke through the $20,000 mark, some investors believed that Bitcoin itself had no value at all and all the increases were due to hype.

Such voices have never disappeared since the birth of Bitcoin. But if we look back at the performance of Bitcoin in the past decade and compare it with traditional assets, we will find that such a virtual asset that is considered to have no value has almost "killed" all traditional assets in the past decade.

Investment strategist Raoul Pal has compiled statistics on Bitcoin's return rate over the past decade. The results are shown in the figure below. Its total return over the past decade has exceeded 6,200,000%, and its annualized return rate has also exceeded 200%.

Even the Nasdaq 100 Index, which has performed best in the past decade, has been far behind. The total return of the index in the past decade was 512.5%, and the annualized return rate was 20%, which is already a leader among other assets except cryptocurrencies. Not to mention gold, which has been compared with Bitcoin, its total return rate and annualized return rate in the past decade are less than a fraction of Bitcoin.

In the past decade, Bitcoin had negative returns only in two years, namely 2014 (-58%) and 2018 (-73%). Before that, Bitcoin had increased by more than ten times or even dozens of times.

The above chart also shows a pattern. Before the annual return of Bitcoin turns negative, it rises for three consecutive years. This year is the second consecutive year of Bitcoin rising since the last negative return. If this pattern really exists, it means that it will continue to rise. Of course, this pattern does not necessarily come true.

Let's look at another picture. Over the past decade, the performance of US technology stocks has been obvious to all, and they are also the main force of the US stock bull market. However, even the US technology giants that have grown the most wildly in the past 10 years have not grown as fast as Bitcoin.

This shows that in the past decade, despite people's doubts about Bitcoin, the price of Bitcoin has been rising. This is very similar to the US stock market in the past decade - setting new highs amidst a chorus of bearish voices.

According to a survey of fund managers by Bank of America, long Bitcoin has now become the third most crowded trade, which shows how popular Bitcoin is.

Who created the Bitcoin bull market?

The Bitcoin bull market three years ago was dominated by retail investors, but this time institutional investors have become the main force.

This year, massive money printing and stimulus measures by central banks around the world have raised concerns about massive inflation, with people turning to inflation-resistant assets such as Bitcoin.

Today, with interest rates near or below zero in developed countries, fiscal spending by governments coupled with central bank debt monetization has become the primary way to stimulate economic growth. The consequence of a massive increase in money supply will be currency depreciation and, potentially, inflation. Ultimately, all of these newly created trillions of liquidity have found their way into alternative currencies such as cryptocurrencies.

Massive money printing by global central banks and unprecedented fiscal stimulus have also caused the returns on traditional assets to become increasingly lower. Investors are not short of funds, but they lack targets that can bring them high returns.

According to a report released by Fidelity Digital Assets last week, 60% of institutional investors surveyed said they would consider allocating non-traditional, highly uncertain but potentially profitable digital assets to their portfolios in the future.

In other words, the global monetary easing policy has made Bitcoin an absolute beneficiary of the COVID-19 economy.

This round of Bitcoin's crazy rise can also be explained from the perspective of supply and demand. Since Bitcoin completed its third halving since its birth in May this year, the reward for each block has dropped to 6.25 Bitcoins, and the supply has been greatly reduced. With the surge in demand, Bitcoin is now more of a supply and demand game in the stock market, which is also a key factor in determining Bitcoin's price.

If only the above factors are present, it may not be enough to attract institutions to invest in Bitcoin. There is another factor that plays a crucial role in the crazy rise of Bitcoin.

In January this year, Grayscale Investment’s Bitcoin Trust was approved as the first digital asset tool that meets the standards of the U.S. Securities and Exchange Commission. On October 12, Grayscale’s Ethereum Trust registration application was officially approved.

Most institutional investors prefer value investing, and their holding cycles are usually very long. They do not buy today and sell tomorrow if the price goes up. Most of them are long-term strategic holdings. Previously, there was a lack of compliant products in the cryptocurrency field, and supervision was also seriously lacking. Therefore, in the previous Bitcoin bull market, institutions were rarely seen.

The compliance of Grayscale Bitcoin Trust products has changed the above situation. According to publicly disclosed information, as of November 9, 2020, a total of 23 companies (a total of 29 institutional accounts) held Grayscale Bitcoin Trust shares, with a total of 59.5532 million trust shares, accounting for 11.55% of the issued shares of Grayscale Bitcoin Trust.

These 23 companies include crypto asset lending companies, hedge funds, mutual funds, private wealth companies, consulting firms, family offices, etc.

It can be seen that the compliance of Grayscale Bitcoin Trust products provides qualified investors such as funds and family offices with a mature channel to purchase Bitcoin assets.

This trend may accelerate in the future. Behind these large investors' continued purchase of Grayscale Bitcoin Trust products may be an irreversible transfer of wealth.

Therefore, on the surface it seems that institutions created this round of Bitcoin bull market, but in fact, they are just following the development trend of the market.

After breaking through the $20,000 mark, where will Bitcoin go?

After Bitcoin broke through the $20,000 mark last night (December 16), many people’s first reaction may be “This is crazy!”

Before the post, Bitcoin once rose to over $22,000. Now many people are concerned about whether Bitcoin has reached its peak. The daily chart of Bitcoin in the past two days is somewhat similar to that before the crash in 2017. As shown in the figure below, in 2017 (left), Bitcoin opened higher when it hit a record high. Yesterday (right), Bitcoin broke through the $20,000 mark and opened higher today.

The trend is surprisingly similar, but will the results be the same? The market conditions in the next few days may give us the answer.

It should be noted that institutional investors, the main force of this bull market, currently show no signs of retreat. Institutional interest in Bitcoin continues to rise, and some institutions are still increasing their Bitcoin holdings.

CoinTelegraph reported on Wednesday morning that Ruffer Investment Company Limited, an investment management company listed on the London Stock Exchange, disclosed its new Bitcoin investment strategy. Ruffe said on Tuesday that the company has included Bitcoin in its Multi-Strategies fund, mainly as a defensive move against the "continued depreciation" of fiat currencies. The fund currently holds about 2.5% of its total assets in Bitcoin.

MicroStrategy, a database software company, is a typical representative of Bitcoin investment. On August 11, the company announced that it would invest all of its $250 million inflation hedge fund in digital currency. Last Friday, the company directly purchased another $50 million in Bitcoin. On Wednesday, it expanded its original $400 million bond issuance to $550 million, and the funds raised will be used to purchase more Bitcoin.

As Bitcoin surged last night, the company's stock price rose by 6%. The company's investment in Bitcoin for 5 months has made more profit than the total net profit it made in traditional software business over the past five years. The company's stock price has doubled in one month.

It is worth noting that although this company may seem unknown, the capital behind it is familiar to everyone. According to information disclosed by MicroStrategy, its largest shareholder is BlackRock Asset Management; the second largest shareholder is Vanguard, the world's largest fund company; the seventh largest shareholder is Russell Investments; and the tenth largest shareholder is Renaissance Technologies.

Therefore, MicroStrategy's large-scale investment in Bitcoin largely represents the attitude of the above four traditional financial giants towards Bitcoin.

Jinshi also mentioned in its morning article that institutional investors are still optimistic about Bitcoin. They believe that breaking through the psychological barrier of $20,000 is just the beginning, and the next step will be to break through the $30,000 mark. Minerd, chief investment officer of Guggenheim Investments, even said that Bitcoin will eventually climb to around $400,000.

There is another piece of news worth noting on Wednesday. CME plans to launch Ethereum futures starting February 8, 2021. The new contract will be settled in cash and is currently awaiting regulatory review. Ethereum is currently the second largest cryptocurrency in terms of market value and daily trading volume. If the review is passed, it will attract a new batch of funds to enter the market.

Therefore, in the long run, the upward trend of Bitcoin may not end so easily, but for retail investors, they need to be careful about Bitcoin's short-term pullback. A pullback of $1,000 or $2,000 is normal.

Before investing in cryptocurrencies such as Bitcoin, individual investors should first consider their own risk tolerance, invest rationally, and avoid blindly chasing more.