2017 Repeat! Behind the Bitcoin Surge: What Is the Market Trading?

Introduction: Bridgewater founder Ray Dalio warned that if Bitcoin begins to compete with legal currency, governments may eventually ban it.

Concise version :
In the past ten days, Bitcoin has been unstoppable, breaking through the integer levels of $15,000, $16,000, $17,000 and $18,000. The year-to-date increase has reached 154%, and it is only "one step away" from the historical high of $19,994 in 2017.
Like the Bitcoin bull run in 2017, this time Bitcoin's rise has also benefited from the weakening of the US dollar. After the US election, the market expects that the next Congress may be controlled by two parties. The Fed's unconventional easing policy this year has made the dollar difficult to move forward. If the United States continues to boost the economy through the Fed's money printing rather than government spending in the future, the dollar situation will become increasingly bearish.
The stagnant performance of gold and silver has also made speculators bet more aggressively on Bitcoin.
Another interesting phenomenon is that the exchange rate of Bitcoin against multiple emerging market fiat currencies continues to set new record highs, indicating that capital outflows from emerging markets through digital currencies are particularly prominent. Can this year's Bitcoin bull market exceed that of 2017? Everything depends on regulation!

01What happened?

On Wednesday (November 18), Bitcoin briefly soared above $18,000. In just ten days, the price of Bitcoin has been unstoppable, breaking through the integer levels of $15,000, $16,000 and $17,000.

Since its pandemic-induced low in March, Bitcoin prices have soared 342%, bringing the year-to-date gain to 154%, just "one step away" from its all-time high of $19,994 in 2017.

The total market value of Bitcoin currently exceeds $300 billion, which is also close to its historical high. Statistics from Deutsche Bank show that historically, Bitcoin has only closed above $17,000 on five trading days.

02Why did it happen?

1. Expectations of US dollar depreciation and volatile gold prices

Analysts believe that, like the Bitcoin bull run in 2017, this time Bitcoin's rise has also benefited from the weakening of the U.S. dollar. The ICE U.S. Dollar Index has depreciated by 4.2% so far this year, and the decline is expected to be the largest since 2017.

After the US election, the market expects that the next Congress may be controlled by two parties, the Republicans control the Senate and the Democrats control the House of Representatives. This means that the fiscal stimulus package passed by Congress is smaller, which puts the Federal Reserve under pressure to increase bond purchases and adopt other policies to boost the economy.

The Federal Reserve's unconventional easing policy this year has made the dollar difficult to move forward. If the United States continues to boost its economy through the Federal Reserve's money printing rather than government spending in the future, the dollar situation will become increasingly bearish.

Hedge fund tycoon Paul Tudor Jones believes that the Federal Reserve’s unprecedented quantitative easing policy at this stage has laid the foundation for inflation, which is conducive to digital currencies that are naturally deflationary.

Against the backdrop of a continued weakening U.S. dollar, only Bitcoin has performed particularly well recently, while traditional zero-interest assets such as gold and silver are still consolidating at previous highs.

This also made the correlation between Bitcoin and gold negative, and the Bitcoin/gold price ratio broke through the previous support of 9.0.

2. Institutional entry into the market, digital assets become mainstream configuration

Grayscale Bitcoin Trust (GTBC) is the first Bitcoin investment tool to receive a public quote and the first digital currency investment tool to obtain SEC reporting company status . With the entry of compliant products such as Grayscale Bitcoin Trust GTBC and EHTE, it undoubtedly provides a compliant channel for traditional capital and greatly lowers the threshold for investors.

These trading tools allow investors to gain exposure to BTC in the form of securities while avoiding the challenges of directly purchasing, storing and keeping BTC. Shares of the GBTC Private Trust can be purchased in the secondary market and were publicly traded on OTCQX in March 2015, at which time its investors did not need to be accredited investors.

As of the latest data, Grayscale Bitcoin Trust holds more than 500,000 bitcoins with a market value of more than US$8.2 billion, accounting for 2.38% of the total bitcoin supply, indicating the enthusiasm of institutions for Bitcoin.

Last month, online payment company PayPal announced the launch of a cryptocurrency payment service. Users will be able to buy, hold and sell cryptocurrencies through their PayPal accounts and shop at approximately 26 million merchants worldwide. The company said its digital wallet will initially allow transactions in Bitcoin, Ethereum, Bitcoin Cash and Litecoin.

The current round of Bitcoin bull market started when Paypal launched its cryptocurrency payment service. Investors believe that it is only a matter of time before other large companies follow Paypal’s lead in adopting Bitcoin payments.

"This bull run is different from 2017 because there are a lot of institutional investors involved. They are all betting on Bitcoin as a hedge against inflation, uncertainty and turmoil," said Alex Adelman, CEO and co-founder of Lolli.

3. Funds continue to flow out of emerging markets

While the price of Bitcoin against the U.S. dollar is only approaching a record high, the exchange rate of Bitcoin against a number of emerging market fiat currencies is constantly setting new records, including the Russian ruble, Colombian peso, Brazilian real, Turkish lira, Argentine peso, Sudanese pound, Angolan kwanza, and Zambian kwacha.

Exchange rate volatility in emerging markets has intensified, and capital outflows through digital currencies are particularly prominent. This capital outflow pressure continues to suppress the monetary policy space in emerging markets, forming a negative feedback.

03What to focus on next?

The most concerning issue for cryptocurrency investors right now is whether this year’s Bitcoin bull market can surpass that of 2017?

For the current Bitcoin market, the most important concern is still regulatory risk. Because not everyone believes in the inevitability of Bitcoin as a legal asset in the financial market, many regulators believe that Bitcoin is used for money laundering and other criminal activities, so it is necessary to distinguish between digital currencies and the blockchain technology that supports digital currencies.

Ray Dalio, founder of the world's largest hedge fund Bridgewater, tweeted on Tuesday that if Bitcoin begins to compete with legal tender, governments may eventually ban it.

“I can’t imagine it being used by a central bank, a large institutional investor, a corporate or a multinational corporation. If I’m wrong about these things, I want to be corrected.”

Although Bitcoin has been unstoppable in recent days, Dalio said that his view on the problems of Bitcoin as an effective currency is simple: " As a store of wealth, it is not very good because it is very volatile. And the correlation between Bitcoin and the price of things I need to buy is very low, which means that it cannot protect my purchasing power."

The current US President Trump has never been interested in Bitcoin. Last year, he wrote on Twitter that Bitcoin and other cryptocurrencies are "not money" : "I am not a fan of Bitcoin or other cryptocurrencies. They are not money. Their value fluctuates greatly and comes out of thin air. Unregulated crypto assets can facilitate illegal behavior, including **** transactions and other illegal activities."

However, U.S. President-elect Biden may have a different view on cryptocurrencies than Trump. Last week, Biden announced that cryptocurrency expert and former U.S. Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler would lead his financial policy transition team.

Gensler has testified before Congress several times on cryptocurrencies and blockchain, refuting comparisons between cryptocurrencies and Ponzi schemes and declaring that the yet-to-be-launched Libra token meets securities requirements under U.S. law.

This month, the Federal Reserve and the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) invited the public to comment on the proposed new travel rule for cryptocurrencies. Under the new proposed rule, virtual assets will be defined as "currency," including "convertible virtual currencies (CVCs)" and digital assets that are legal tender. FinCEN first mentioned CVCs in guidance issued in 2013, and it was also the first U.S. agency to publicly discuss how to regulate cryptocurrencies.

Brian Brooks, acting director of the Office of the Comptroller of the Currency (OCC), said that U.S. banking institutions are studying ways to provide support for crypto assets to interested customers.

In a podcast episode, Brian Brooks shared his thoughts on Bank of America starting to explore crypto avenues following the Office of the Comptroller of the Currency (OCC) decision to grant banks the right to custody cryptocurrencies. Brooks believes that the complexity involved in developing an internal framework to act as a cryptocurrency custodian will prompt banks to continue to reach out to existing centralized exchanges to store customers’ cryptocurrencies.

In terms of emerging markets, the capital control measures of these countries are also worthy of attention, with particular focus on their management measures on digital currencies.