Why your Bitcoin is "halved" ahead of schedule

Editor's note: This article comes from BlockVC (ID: blockvcfund)

Core ideas:

• Through the changes in interest rates, exchange rates and gold prices, we can understand the deep logic of the changes in Bitcoin prices in this round of market. Recently, the Federal Reserve has released a signal that the expectation of interest rate cuts has weakened, the impact of macro factors has weakened marginally, and the market has returned to the emotional game;

• Market styles continue to diverge significantly. Among the top 500 coins in the past 30 days, about 50% of the coins have negative returns in terms of US dollars, and more than 75% of the coins have underperformed Bitcoin. The turning point of style switching has not yet arrived, and the differentiation is expected to continue;

• The open interest-to-transaction ratio of BitMEX and OKEX contracts has gone from overheating to cooling down, and the CFTC report shows that the proportion of institutional short positions in CME Bitcoin futures has increased.

At 7:30 a.m. on June 22, Bitcoin rose by more than $10,000, and the market was boiling.

On June 26, the price of Bitcoin hit a high of $13,000, setting a record for trading volume. During this period, Coinbase crashed and the price quickly fell below $9,700. It has now ended its sideways consolidation around $11,000 and temporarily closed at $12,600.

Bitcoin volatility Data source: Charlie Bilello on Twitter

Bitcoin price volatility has soared again, returning to the peak level at the end of the 2017 bull market. Compared with the rare high volatility of the Dow Jones Volatility Index (CBOE VXD Index), Bitcoin market trading sentiment has returned to a level of heat that is difficult to measure with conventional investment logic.

Perhaps many people firmly believed at the beginning of the year that Bitcoin would rise to $10,000 in 2019, but they never expected that the goal of $10,000 would be achieved in such a sharp manner at the end of June, and there is a high probability that it would achieve the rare five-day winning streak in history. The emergence of Libra has brought Bitcoin further into the mainstream vision, and Bitcoin's role in hedging macro risks has been increasingly mentioned. What is more intuitive is that Bitcoin has not seen a significant adjustment while rising all the way. Although there are huge differences in market views between long and short investors, people generally believe that Bitcoin will not fall below $10,000 again. This time is different. Perhaps the "eternal bull market" has begun.

Unlike before, digital currency investors began to talk about the economic situation, the Fed's interest rate cuts, trade frictions and even currency hegemony, which may also be the core of people's belief that "this time is different". The main reasons why people think this time is different are:

1. Institutional investors enter: value storage means and asset categories;

2. Geopolitical environment: Declining confidence in the global economic environment and seeking safe havens;

3. The entry of mainstream Internet giants will bring greater market penetration and become the imagination of currency solutions

The voices in the market that "this time is different" are essentially the reasons that people must find in the face of continued psychological reinforcement and the search for strengthening positive feedback. This kind of voice is a signal that deserves high vigilance. There is no difference in market price cycles, but the factors driving changes may be different. If you believe that the price of Bitcoin is beginning to be driven more by macro factors than speculative sentiment, we need to put Bitcoin aside and take a look at the recent performance of gold.

The musicians play their instrument, I play the orchestra.

Howard Marks of Oaktree Capital recently published a memo titled "This Time It's Different", discussing the view that the US economy is "different this time". Although the US economy has shown recessionary signs such as an inverted interest rate spread, the Federal Reserve has released expectations of interest rate cuts. Will the recession not happen again? People have the same doubts about the economic situation that "has not fallen into recession as expected" as they do about the current "unscrupulous Bitcoin that only rises and never falls". Is it really "different this time"?

Gold is the asset that has been on people’s lips recently along with Bitcoin. Gold has seen a sharp rise since the end of May, with a monthly increase of 12.5% ​​(although this may only be Bitcoin’s one-day increase, its performance as a traditional asset is indeed very impressive).

China's central bank foreign exchange reserves Data source: World Gold Council BlockVC Strategy Research

In this round of gold price surge, in addition to investors such as hedge funds, central banks of various countries have also personally participated in the "game". According to statistics from the World Gold Council, the People's Bank of China has also increased its gold reserves for six consecutive months since the first quarter. China's current gold reserves are about 1,916 tons, with a total value of nearly US$80 billion, and are still increasing. Looking back at the timing and price points of the People's Bank of China's gold holdings, the most recent two times were in 2009 and 2015, and the implications are also quite interesting.

The price change of gold is not simply affected by the single broad line of interest rate cut expectations. In history, there have been many cases where the Federal Reserve cut interest rates and the price of gold fluctuated or fell. There are also cases where gold performed flatly during geopolitical crises. The price of gold has always been the reaction target of the US dollar credit system. On the one hand, it is affected by the US real interest rate (nominal interest rate minus inflation rate), especially the relative change speed of nominal interest rate and inflation rate; on the other hand, it is highly negatively correlated with the strength of the US dollar exchange rate.

At present, the forward-looking economic data of the United States is weakening, and the market is beginning to worry about the end of the recovery cycle of the United States. Affected by the expectation of interest rate cuts, the long-term yield of U.S. bonds has fallen very quickly, while the inflation rate has remained stable. The real interest rate has fallen rapidly, driving up the price of gold. At the same time, since gold and the price of the U.S. dollar index are highly negatively correlated, the potential recession has led to an increase in expectations of a depreciation of the U.S. dollar, and the depreciation of the U.S. dollar has become an important driving force for further raising the price of gold - the rise in the price of gold is essentially a result of investors' bearish view on the U.S. dollar credit system.

Bitcoin and US 10-year bond interest rates inverse

Data source: Tradingview BlockVC Strategy Research

If you observe carefully, when Bitcoin and gold began to accelerate their rise at the same time, the inverse of the U.S. 10-year Treasury bond rate began to soar upward. The U.S. 10-year Treasury bond rate fell below 2%. Bitcoin did begin to resonate more with macroeconomic changes. Interest rates are the real driving force behind capital movements, but the transmission path may have more impact on exchange rates.

Pushing a String and Short the World?

In addition to gold, the most sought-after asset at the moment is Chinese government bonds. According to the latest data from ChinaBond, the balance of bonds held by overseas institutions in China's bond market at the end of May was RMB 1,610.6 billion, with an increase of RMB 76.6 billion in May. Foreign investment has increased its holdings for six consecutive months, creating the largest increase in a single month this year, and China has become the world's second largest bond market.

Global negative interest rate bond size Data source: Bloomberg

One of the main reasons why the Chinese bond market is sought after by overseas investors is that there are very few high-yield interest-bearing bonds available for investment worldwide. According to the latest report by Bloomberg, the total amount of negative interest-bearing government bonds in the world exceeds 13 trillion US dollars, and about 40% of bonds in the world have interest rates below 1%.

Data source: Charlie Bilello on Twitter

Since 2016, a large portion of government bond yields in Europe and Japan have been negative. The situation is becoming increasingly serious. Shortly after the above chart was published, the 10-year government bond rates in Germany, Australia, Sweden and France fell below 0, and the 10-year bond rates in Spain and Belgium also hovered around 0.

As early as 2016, Bridgewater warned of the end of the long-term debt cycle and the dual limit problem of the central bank, and used the metaphor of "Pushing a string", referring to the asymmetry of monetary policy, which has a significant effect on inflation but not on deflation. Major countries in the world are trapped in a negative interest rate state, interest rates and risk premiums continue to narrow, and the marginal utility of monetary policy to lower interest rates to stimulate the economy is decreasing. The global economic growth is sluggish, and the monetary policies of most countries are almost ineffective, which is equivalent to entering the limit of "pushing a string". With high debt levels, low income growth, and low investment returns, the world may enter an era of "Japanization", and what is more serious is the ensuing wave of populism, nationalism, and anti-globalization.

The limit of negative interest rates will force more money into the market, and riskier assets will be more attractive than bonds and cash. Investors will be more inclined to invest in non-financial wealth storage assets such as gold. At the same time, due to the current low interest rates, all asset prices are greatly overvalued. Once interest rates rise too fast and exchange rates fluctuate sharply, there will be a backlash of bubble bursting - this should be a major imbalance that many people will only experience once in their lifetime. The chaos in Europe, Brexit, the currency crisis in emerging markets, the Sino-US trade friction, and even Hong Kong, all the scattered and seemingly discrete events are being pieced together into a complete puzzle according to the same clue.

This is the most practical reason and logic behind "this time is different". Compared with the slow and painful treatment of increasing productivity to match the growth rate of debt, or promoting reforms or implementing active fiscal policies, it is faster and easier to quickly transfer assets to non-financial wealth storage assets such as gold and Bitcoin.

There is nothing different this time. Bitcoin and gold, as non-financial wealth storage asset types, are favored by capital in a specific economic environment. There is no difference in their connotations and logic.

This time is actually different. The core reason why "this time is different" is that there is a new market driving force. There is no need to elaborate on the various advantages of Bitcoin over gold. In the "negative interest rate era" and the wave of anti-globalization, the call of "Bye Gold Buy Bitcoin" is gradually rising, and a large amount of wealth will definitely flow into the Bitcoin and digital currency market. Since the birth of Bitcoin nearly 11 years ago, as a currency alternative, it has finally ushered in the "singularity" of truly "confronting" and "challenging" the traditional monetary and financial system. Imagination seems to have finally illuminated reality.

Perhaps there will be a situation in the near future where people will question the growing debt and solvency of the United States. The Federal Reserve is forced to issue currency on a large scale, causing the dollar to depreciate sharply to hedge debt. Will this stimulate domestic inflation in the United States? Or will the United States incorporate Libra into the monetary policy system and directly apply monetary policy to borrowers through Libra, or is it possible for Libra to complete this monetary activity independently, thus realizing the third form of Money Police?

In any case, we look forward to the rewriting of monetary and financial textbooks on Modern Monetary Theory (MMT) and the role that Bitcoin and digital currencies will play therein.

Grand narratives and short-term trading

“The symbiosis of ‘this time is different’ and bullish views suggests that the market environment is seen as ‘absolutely perfect.’ Once that view swings to ‘no hope,’ the consequences will be painful for investors.”

Shouting "this time is different", a large number of investors rushed into the market regardless of the fact that Bitcoin had rebounded 5 times from the bottom. The market has a lot of reasons to explain why Bitcoin will hit new highs, why it will usher in an "eternal bull market", why there will be no crash this time, and why "this time is different". Interestingly, at the moment when these calls were the highest, after the market released a huge amount of volume on June 26, Bitcoin quickly pulled back for six consecutive trading days, falling to around $9,740, a drop of nearly 40% from the highest point, catching all investors waiting for a breakthrough to a new high off guard.

Investors are accustomed to hypnotizing and brainwashing themselves with grand narratives measured in years, but they constantly predict short-term market trends on a weekly or monthly basis. Given the high volatility of cryptocurrencies, pullbacks of around 30%-60% often occur during historical bull markets. In many cases, the push for trends can cause prices to deviate from facts for a long time, and the duration can even be very long. Monthly pullback cycles are also common in bull markets.

The high-leverage contract market has undoubtedly revealed the frenzy. The total trading volume of various term contracts on BitMEX soared from an average of US$800 million to US$1 billion per day in early March to US$14 billion on June 27. The daily trading volume has increased more than 10 times, and the total open interest has rapidly increased from US$600 million to US$1.2 billion. The total open interest has more than doubled in just one quarter.

BitMEX position transactions Data source: BitMEX BlockVC Strategy Research

Perpetual contract XBTUSD is the most popular trading product on BitMEX. The perpetual contract position accounts for about 76% of the total position, while the trading volume accounts for more than 95% of the total trading volume, and the trading turnover level is very high. As can be seen from the figure below, since the end of May, the total position and trading volume of BitMEX's perpetual contract have increased by leaps and bounds.

Since many short-term speculative traders and noise traders in the contract market mainly use intraday trading methods to generate trading volume but not overnight positions, trading volume will contain more speculative information than positions. Positions are usually considered to mainly reflect the opinions or hedging needs of hedgers, and the trading-to-position ratio can also be used to characterize the market's trading sentiment.

Judging from BitMEX's transaction-to-open-ended ratio (the yellow line in the figure below), the transaction-to-open-ended ratio of the contract market has continued to rise in the past two months. Even without conducting a time series analysis, the market's speculative sentiment has heated up to the point where it can be described as "off the charts" just by looking at it with the naked eye. However, since the sharp drop on June 27, both perpetual contract positions and trading volumes have dropped significantly, and the probability of this round of market trends coming to an end has increased significantly.

BitMEX perpetual contract position transaction Data source: BitMEX BlockVC strategy research

This can also be seen from the contract basis and term structure. Since mid-June, Bitcoin has broken through the previous short-term high of around US$9,000, the premium of forward contracts has begun to expand continuously, the term structure has continued to deepen, and long-term optimism has continued to strengthen.

BitMEX contract basis Data source: BitMEX BlockVC Strategy Research

OKEX platform has the highest open interest and trading level of the last quarter contract, with the quarterly contract open interest accounting for about 67% and the trading volume accounting for about 62%. The total open interest and total trading level of the OKEX platform are basically consistent with the trend of BitMEX, with the highest daily total trading volume exceeding 75 million (about US$7.5 billion), which is 14 times the normal daily average, and the open interest increased to about 7 million (contract US$700 million).

The basis changes of OKEX's June quarterly contract delivery day and BitMEX's basis are completely opposite. When BitMEX's June contract was delivered, the futures turned to a large discount, and the forward contract basis also returned to a certain level, indicating that BitMEX investors closed a large number of long positions on the delivery day. Although OKEX's forward basis also showed a regression trend, the quarterly contract basis turned to a large premium, indicating that OKEX investors mainly completed the closing of short positions. The total amount of positions has been greatly reduced in the past two days, and the market has shown a certain wait-and-see sentiment.

OKEX contract basis, positions Data source: OKEX BlockVC Strategy Research

Judging from the differences in trading positions and basis changes between BitMEX and OKEX, coupled with the continued premium of Bitcoin on fiat exchanges, it can generally support the recent mainstream view in the market that "this Bitcoin bull market is driven by US institutions". The industry has recently been keen on discussing Grayscale Investments' increasing Bitcoin holdings. "Grayscale purchased more than 11,000 BTC in April 2019, accounting for about 21% of BTC's global monthly supply." Grayscale's holding curve is indeed getting steeper, and the implied premium of Grayscale unit trust shares is getting higher and higher. Institutional investors seem to be FOMOing.

From the divergence in the trends of BTC, ETH and EOS, we can also find that BTC led the rise strongly, ETH followed the weak rise, and EOS, which was mainly speculated by Chinese users, not only underperformed significantly but also broke down first. This can indeed support the view that the market user structure and capital preferences are changing. Overseas investors have indeed taken a relative initiative in this market.

Data source: Grayscale CME

The Bitcoin futures data released by the Commodity Futures Commission (CFTC) also partially confirms this view. The combined positions and trading volumes of CBOE and CME, denominated in US dollars, are close to the peak at the end of 2018. An interesting finding is that among the four reporting roles of traders, asset management companies, hedge funds, non-reporting assets and other traders, asset management institutions' positions have steadily increased, but the long and short exposures are basically balanced. Other traders (mostly retail investors) have seen a large number of long orders. Hedge funds and other traders have begun to reduce their long positions slightly and gradually increase their short positions. Overseas investors may begin to calm down in their attitude towards the market.

CFTC Futures Positions Data source: CFTC

Altcoins don’t deserve a name despite the promised “bull market”

Digital currency investors have long discovered the weirdness and discomfort of the recent market. Since April, Bitcoin has been the only outperformer, while mainstream currencies have lagged behind and experienced stagflation. Many small and medium-sized market capitalization currencies have fallen sharply, which has disappointed all investors who "path-reliantly" hoped to take advantage of large fluctuations in small and medium-sized market capitalization currencies.

Simply using the dollar-denominated currency price to examine the market differentiation, as shown in the figure below, among the top 500 currencies by market capitalization, Bitcoin has risen 23.58% in the last 30 days, ranking 95th, with a median yield of -8.28%, which means that more than 75% of the currencies have significantly underperformed Bitcoin this month, and more than half of the currencies have even had negative returns against the dollar in the last 30 days.

Judging from the performance in the past two months, Bitcoin’s cumulative increase in USD value in the past 60 days is as high as 92.24%, ranking 63rd among the top 500 in terms of market capitalization. The median of the 60-day increase is 11.43%. However, more than 75% of currencies still underperform Bitcoin, and nearly 40% of currencies have a negative yield in USD terms in the past two months (many small and medium-sized currencies with high rankings and high yields have introduced this model...).

TOP500 coin income distribution Data source: BlockVC Strategy Research

Judging from the sentiment index, the market showed obvious panic when Bitcoin was fluctuating sideways at a high level in mid-May, and most of the chips in the market were concentrated at the $8,000 level. However, since the price of Bitcoin broke through $9,000, the turnover rate and rise and fall ratio of small and medium-sized market capitalization currencies implied in the sentiment index have been very sluggish, which means that the overall market speculation sentiment has not risen significantly at the same time. Investors' greed and panic are all concentrated on Bitcoin. This "bull market" is equivalent to a "bull market" that belongs only to Bitcoin.

Sentiment Index Data source: BlockVC Strategy Research

Investors have been familiar with the argument that most small and medium-sized currencies are about to die since the panic at the end of last year's bear market, but they did not expect that these currencies did not die in the Bitcoin crash, but instead were dying in the Bitcoin surge. In fact, this trend has lasted for more than half a year, but the contradiction broke out in this Bitcoin surge.

Judging from the TOP50 coin transaction volume differentiation index developed by BlockVC in the figure below, in the bull market of 2017, the transaction volume of the TOP50 coins became increasingly differentiated, indicating that investors were very widely involved in the speculation of more coins. Since January 2018, the concentration of market transaction volume has continued to concentrate on the top projects, and air coins, small and medium-sized market value coins, and second-tier mainstream coins have lost blood one after another, and even some mainstream coins have begun to fall behind.

At the same time, this indicator is also a very good predictor of short-term market reversal trends. Whenever the transaction volume is more concentrated towards the top, it is more likely to see an upward turning point. Conversely, once the trading heat begins to spread and differentiate, the short-term market is about to see a turning point. Recently, Bitcoin has continued to consolidate and surge again, and the market differentiation has increased, indicating that trading sentiment and heat have spread and differentiated from high levels, and adjustment risks are approaching.

TOP50 transaction differentiation Data source: BlockVC Strategy Research

In addition to the continuous concentration of trading volume, the earnings differentiation of the TOP200 currencies is also expanding. Earnings differentiation refers to the difference between the average earnings of the top 1/10 currencies with the highest increase and the average earnings of the bottom 1/10 currencies with the largest decrease in a portfolio. It is an indicator used to measure the market's short-term overreaction. The current market earnings differentiation has reached the highest level in the past 6 months.

TOP200 coin yield differentiation Data source: BlockVC Strategy Research

The price performance of small and medium-sized market capitalization currencies in the most recent quarter is "different this time", mainly because of the source of funds and investment preferences that drove this round of market:

Different from the previous bull markets driven by the ICO craze, this round of market is characterized by funds from US institutions entering the digital currency market in pursuit of Bitcoin's non-financial asset attributes, and will only participate in Bitcoin transactions, and it is difficult to spill over to other currencies.

There are no obvious signs of continued inflow of funds from most individual investors, and Bitcoin continues to strengthen, and its blood-sucking effect on the current market is still extremely serious. Most of the small and medium-sized market capitalization currencies that have been able to outperform Bitcoin recently are "model coins". The core driving force of the market is different, and the performance of small and medium-sized market capitalization currencies is naturally "different this time."

Can small and medium-sized market value currencies still participate, and when can they participate? BlockVC once counted the price trends of mainstream currencies and small and medium-sized market value currencies in 2015 in its strategy weekly report "The fire in your heart is smoke in the eyes of others" on December 28, 2018. The current trend is actually not special. At the beginning of the bull market in 2015, mainstream currencies led by Bitcoin took the lead in opening the market, and other small and medium-sized market value currencies would fall rapidly. When Bitcoin fluctuated at a high platform and began to pull back, small and medium-sized market value currencies would hit a new low. It was not until Bitcoin broke through the previous high to confirm the bull market that small and medium-sized market value currencies would show elasticity and excess returns.

The reason behind this is mainly due to the degree of divergence in the market participants' understanding of the market stage. Judging the market style rotation and timing of small and medium-sized currencies requires considering the degree of divergence in the market. Return dispersion is the standard deviation of the monthly return of the portfolio. It is an indicator to measure the degree of divergence in the market and can help assist in judging the details of the transaction.

TOP200 Return Dispersion Data Source: BlockVC Strategy Research

As shown in the above figure, the market conditions in the past six months showed very large market divergences on February 25 (Bitcoin US$3,800), April 24 (Bitcoin US$5,500), and June 28 (Bitcoin US$12,000).

In the early stage of a bull market, the dispersion of returns will be very large, and the market's divergence on the future market will continue to increase, resulting in a very obvious momentum effect of Bitcoin's strong and strong. Funds will chase mainstream coins in groups, and small and medium-sized market capitalizations can only perform in the ultra-short-term band when the market's short-term divergence decreases, and the deeper the fall, the faster and more it rebounds. The most suitable period for the performance of small and medium-sized market capitalization currencies is often when the market price remains stable or rises, and the dispersion of returns is low (the market divergence is low). In recent times, the market divergence has continued to decrease, which is a short-term opportunity window for participating in the trading of some small and medium-sized market capitalization currencies. However, small and medium-sized market capitalization currencies rotate quickly, and it is difficult to participate in heavy positions. Investors should pay attention to the risk of large fluctuations.

Compared with the bloody 2018, the first half of 2019 can be described as a warm breeze. From the beginning of 2019 to date, among the 38 major asset classes that Deutsche Bank has focused on, 37 have achieved positive total returns in local currency except for silver, but silver also achieved a remarkable increase in June.

Data source: Deutsche Bank

What is thought-provoking is that the excellent performance of these major asset classes does not come from an increase in risk appetite. The simultaneous rise in traditional safe-haven assets such as gold and government bonds of developed market countries and various risky assets shows that global easing expectations are fueling the trend. Even if more funds are invested in the market, investors tend to buy safe-haven assets with higher safety margins. The current market risk appetite is very low. Interest rate policies will be transmitted to the US dollar exchange rate in the future and further affect the performance of all major asset classes. Under such macro conditions, gold and Bitcoin are the main opportunities throughout the year.

For the main long-term market, investors should not take a long-term view and do short-term trading, and use ultra-long-term logic to explain short-term market changes. Taking gold as an example, the consensus expectation of gold rising is already too strong, short-term positive news is frequent, trading volume is greatly enlarged, and there is still a long blank time window before the Federal Reserve's interest rate meeting at the end of July and the beginning of August. The expectations of interest rate cuts and dollar depreciation have been fully priced in. Gold currently has short-term head signs. The long-term opportunities for gold in the future require a substantial recession in the macro economy, especially in the transmission of fluctuations from interest rates to exchange rates. The future market of gold will also be long-term and bumpy.

Based on the same macro logic, from the perspective of trend structure, although Bitcoin is still in the accelerated upward trend since mid-June in the short term, the accelerated upward channel trend has not been destroyed by the previous correction, and there is still momentum for inertia to rush upward, but due to the divergence of turnover at the high level of 13,000-14,000 US dollars in the previous period, and the large number of bottom-fishing on July 1 and 2 consumed a lot of long momentum, the continued upward momentum is not strong. In addition, the recent Fed's expectations of interest rate cuts have weakened, and the marginal effect of macro factors has decreased. Bitcoin is likely to return to the emotional game market. Even if Bitcoin rushes to the 15,000 US dollar line, the risk of the last rush cannot be ruled out. In the future, Bitcoin will continue to move closer to MA30 and fall back, and after slow fluctuations, it will adjust to the mid-line of 9,700 US dollars. Investors who get off the bus early or take the wrong bus have the opportunity to get a very good entry opportunity at the position of MA120 daily line.