Bitcoin breaks through $20,000, explaining the driving force behind its rise

Text | Twenty-three Painting Students

Operations | Gai Yao

Editor | Hao Fangzhou

Produced by | Odaily Planet Daily (ID: o-daily)

According to OKEx market data, around 22:18 on December 16, Bitcoin fell back to 20546.1 USDT after briefly touching 20800 USDT, with a 24-hour increase of 6.02%.

Tonight, Bitcoin broke through $20,000, making history again.

The price of Bitcoin has been soaring. Who is injecting the "booster shot" behind the scenes, and what risks are involved?

Odaily Planet Daily believes that the main driving forces for BTC's long-term rise this year include four main factors: the COVID-19 pandemic, the massive money release by central banks (mainly in the United States), Grayscale's increased holdings, and DeFi lock-ups. In the short term, after BTC breaks through $20,000, it will trigger a new round of FOMO sentiment. Bitcoin will inevitably experience high volatility, and market risks will rise sharply. Traders should remain vigilant.

COVID-19 has prompted more people to invest in Bitcoin

Grayscale said in its report "The Great Transfer of Wealth Pushes BTC to Become a Mainstream Investment Target": Among the Bitcoin investment respondents surveyed, 63% said they made the decision to invest in Bitcoin because of the impact of the new coronavirus epidemic, and 37% said they were not affected by the epidemic. According to the respondents' answers, Bitcoin seems to have some similarities with safe-haven assets, such as:

1. Scarcity;

2. Verifiable;

3. Not much correlation with traditional financial markets and not controlled.

We further compare the gold and Bitcoin charts:

The candlestick chart represents the trend of gold, and the line chart represents the trend of Bitcoin. There is an interesting phenomenon and time node here. We use yellow arrows to represent the trend of gold and red arrows to represent the trend of Bitcoin. We can find that Bitcoin has a strong correlation with gold from May to mid-September, but is weaker than gold overall; from September to mid-October, Bitcoin and gold still have a strong correlation, but at this time Bitcoin began to be stronger than gold; starting from October 23, Bitcoin and gold have taken completely opposite trends, Bitcoin continues to rise, while gold begins to fall. This huge difference is mainly caused by the increase in holdings by institutions such as Grayscale. The demand for Bitcoin by institutions has exceeded that of gold. We will introduce it in more detail later.

The central bank of a major country is releasing money, making the value of Bitcoin more prominent

The sudden outbreak of the COVID-19 pandemic this year has led to a massive money release by the central banks of major countries. It is actually easy for everyone to understand why the central banks of major countries release money, because Bitcoin itself is a scarce resource, and rising tides will lift all boats. However, at present, BTC has risen a bit too high. Is it deviating from its own value?

There are two problems here: the central bank is releasing a lot of money while vigorously developing the central bank's digital currency. There are many discussions about the competition between the two. What I want to say is that in the blockchain world, it is very similar to the Internet, and the siphon effect of the leading is obvious. The value of blockchain 1.0 technology is mainly concentrated on Bitcoin. If there is new innovation, new value will be regenerated, such as the public chain Ethereum, such as the application Uniswap (transaction), etc. For finance and currency, security and stability are the most important. The longer Bitcoin survives, the higher its value and the stronger its future competitiveness. This is because the longer the chain, the more difficult it is to tamper with, and the safer it will be.

The second very interesting phenomenon is that on January 3, 2009, Satoshi Nakamoto wrote in the Bitcoin Genesis block: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks". At that time, Bitcoin was worthless; and now, a new round of fiscal stimulus measures to deal with the epidemic in the United States is likely to be achieved.

Grayscale's increased holdings directly boosted Bitcoin

Grayscale itself is a trust company that mainly earns management fees from trust products. It does not specialize in "cryptocurrency speculation", and the main buyers behind it are mainly institutional investors.

According to data disclosed by Grayscale in the third quarter of 2020, the main users of Grayscale products are institutional investors (81%), followed by qualified investors and family offices (8% each). 57% of the users are from outside the United States.

As of November 9, 2020, according to publicly disclosed information, a total of 23 companies (29 institutional accounts in total) hold 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 (Note: The statistical caliber is the information publicly disclosed by institutions in the US SEC. The trust shares held by institutions will change in different reporting periods. This article counts institutions that still hold trust shares as of November 9, 2020). The 23 companies include crypto asset lending companies, hedge funds, mutual funds, private wealth companies, consulting firms, family offices, etc.

Image from Qianfeng Capital

In the previous bull market, speculation and hype were serious, while institutional investment was more inclined to value investment, and the general holding period was relatively long, and most of them were strategic holdings. At present, the market is still in the early stage of the "Grayscale bull", and the purchase volume is still increasing rapidly, and the possibility of Grayscale selling is relatively small. The following is a detailed introduction to this serious imbalance between supply and demand.

After the compliance of Grayscale Trust products, more and more restricted institutional investors have been provided with channels to buy BTC. In January this year, Grayscale Bitcoin Trust was approved as the first digital asset tool that meets the standards of the US Securities and Exchange Commission. On October 12, the registration application of Grayscale Ethereum Trust was officially approved. The compliance of Grayscale Trust products is one of the important incentives for attracting institutional investors to enter in large numbers this year, and this trend will accelerate in the future. Behind the continuous purchase of Grayscale Bitcoin Trust products by institutional investors is an irreversible transfer of wealth.

Odaily Planet Daily Note: In the United States, some institutional investors with investment restrictions cannot enter cryptocurrency exchanges to buy BTC in the name of the institution, and can only buy Bitcoin through trust channels. In addition, institutional investors are more accustomed to traditional investment methods such as trusts.

The design of Grayscale Bitcoin Trust makes it difficult to create selling pressure on BTC, and its holding plan is more inclined to long-term holding. Institutional investors will receive Grayscale's GBTC after purchasing Grayscale's Bitcoin. Investors can exchange BTC for GBTC (with a half-year unlocking period), but cannot exchange GTBC for BTC. Grayscale Bitcoin Trust currently has no redemption plan, and the trust can seek approval from regulators to implement the redemption plan. This means that neither Grayscale nor institutional investors are likely to create direct selling pressure on the BTC spot market through the GBTC they hold.

In general, institutional investors are still entering in large numbers, and the possibility of a sharp drop in BTC is relatively low. With huge institutional funds flowing into the limited-scale cryptocurrency market, this round of bull market is bound to be a long and slow bull market.

Why are institutions flocking in?

The traditional financial system is being deconstructed, market risks are increasing, and funds are looking for a way out. This year, the United States expanded its balance sheet by more than 2 trillion US dollars in just 2 months; the size of US debt has also rapidly expanded to 27 trillion US dollars. As of the end of October, the Federal Reserve's budget deficit had reached 3.1 trillion US dollars, which was three times higher than the same period last year; this time the fiscal deficit hit an 11-year record high. Not only that, the budget deficit as a percentage of GDP hit a 56-year record high of 16%. As the hegemon of the global financial system, the US dollar has such a high risk that it is really difficult to reverse the situation. This not only makes ordinary people worry and turn to digital currency, but also makes central banks of various countries step up the development of their own digital currencies and try to form a new financial payment system. The digital financial system is undoubtedly the best alternative option.

Decentralized finance is being established, flourishing, and innovating. This year, DeFi has emerged, and the leading lending company Compound has innovatively introduced governance tokens to kick off the process. In fact, the essence of Compound's business is margin trading. The activeness of Compound applications has made digital asset transactions more active. Users can borrow digital currencies from Compound-like applications at low interest rates, and then apply them to digital asset transactions that can generate higher returns. Data shows that the trading volume of DEX leader Uniswap has increased significantly during the same period.

The [Constant Product] model adopted by Uniswap allows users to exchange tokens directly in the exchange pool, which not only changes the previous order book trading model, but also lowers the threshold for market making, allowing every user to become a market maker for a certain trading pair and share the commission income. This is very attractive to borrowers who have successfully raised funds and raised coins in Compound. Uniswap's innovative mechanism has, to a certain extent, seized some of the users and traffic of traditional centralized exchanges.

yearn.finance is also financially innovative. As a decentralized financial platform, it covers complex functions such as aggregated liquidity pools, leveraged trading platforms, and automatic market making. It can automatically allocate and transfer tokens borrowed by investors to dYdX, Aave, and Compound to achieve maximum returns.

This series of financial innovations have jointly contributed to the DeFi boom. These innovations have important value. They have successfully migrated the original centralized financial facilities to the blockchain, and the wealth in the traditional financial market has also been transferred accordingly.

A large amount of BTC is locked in DeFi, giving Bitcoin new value

BTC has played a role similar to gold reserves during the DeFi boom, which is also one of the important drivers of the continued rise in BTC prices. WBTC, issued in a 1:1 anchoring manner, is already the sixth largest token on Ethereum. According to the official website, there are currently 122,281 WBTC, and the custodian holds an equal number of Bitcoins, while in mid-September, only 80,000 Bitcoins were anchored and tokenized.

The rise of DeFi has enabled people to not only enjoy long-term appreciation of Bitcoin, but also to enjoy stable returns from liquidity mining. This is a new empowerment for Bitcoin, giving Bitcoin a wider value. With the implementation of more applications, Bitcoin will continue to be empowered, and its intrinsic value will continue to grow. The figure below shows the rapid growth of Bitcoin lock-up. It is worth noting that Grayscale's large-scale holdings also started from this stage.

The megatrend of digitalization

The four main drivers mentioned above are actually derived from a larger trend - the digital trend, in which humans and their wealth are migrating to the Internet. The traditional financial order is being deconstructed, so central banks of various countries are stepping up the research and development of digital currencies and the establishment of a digital currency system; institutional investors are transferring traditional assets to digital assets; decentralized finance based on blockchain is emerging, and this year's COVID-19 pandemic has accelerated this digitalization process, and the future has just begun.

How much room for future growth is there?

Grayscale said in the report "The Great Transfer of Wealth Promotes BTC to Become a Mainstream Investment Target" that although Bitcoin was only a niche asset that attracted a small number of investors in the early stages, it is now increasingly accepted by mainstream investors. Survey data shows that the number of potential market investors in Bitcoin was about 21 million in 2019, but it has grown to 32 million in 2020. In 2019, 53% of investors said they were "familiar" with Bitcoin, but this has increased to 62% in 2020. More than 50% of respondents predict that digital currency will become mainstream before 2030. Although most Bitcoin investors do not have much income at present, $68 trillion of wealth will be transferred to the younger generation who are inclined to invest in digital currencies in the next 25 years.

Nick Panigirtzoglou, a market quantitative analyst at JPMorgan, believes that "over time, millennials will become the most important part of the investment world, so Bitcoin and gold will compete fiercely, which is beneficial to Bitcoin's long-term upward trend. Technically, the market value of Bitcoin should increase by at least 10 times in order to match the gold market based on physical bars and coins."

In the long run, Bitcoin still has a lot of room for growth, but in the short term, if BTC breaks through $20,000, it will inevitably trigger a new round of FOMO sentiment. Bitcoin will inevitably experience high volatility and market risks will rise sharply. Traders should pay attention to risk control.