Can ETF , U.S. Federal Reserve interest rate cuts, and election events help the crypto market usher in a bull market? Herman, former Executive Director of Goldman Sachs' FICC business in Asia, analyzes Web3 market conditions and major events. The key points are as follows:
The market needs to pay attention to the overall economy, and the US Federal Reserve has not given a clear commitment to cut interest rates.
The interest rate cut was fully priced in as early as one and a half to two months ago. The market generally expects two interest rate cuts this year. Although there was no interest rate cut in July, the market's expectation for an interest rate cut in September exceeded 100%, which means that the interest rate may be cut by more than 0.25 percentage points. Therefore, whether the Federal Reserve cuts interest rates or not has very little impact on the market.
After the US Federal Reserve Chairman Jerome Powell spoke, you can think about the return of the overall economy, that is, re-emphasis on overall factors such as inflation and economic growth, to re-evaluate the possibility of the US Federal Reserve cutting interest rates in September. Because J.Pow's speech emphasized data tracking, it requires a data set dependent, that is, a series of data that perform well before interest rate cuts can be considered. This time he will give equal emphasis to inflation and growth, which is a positive signal. In the past, inflation was given priority, followed by growth.
The US Federal Reserve's shift to focus on economic growth requires a high threshold: if non-farm employment falls below 125,000, it may prompt the Fed to change its focus. This goal is difficult to achieve, so the Fed's focus is still on inflation. J.Pow’s speech mentioned equal emphasis on both, which means that inflation has been controlled to a certain extent and the confidence in the future is stronger than in the past, but he did not give a clear commitment to cut interest rates.
Compared with the European Central Bank (ECB)'s interest rate cut attitude in March, the Fed's attitude did not give the market 100% confidence, but the market priced in more than 100%. The entire interest rate market may be over-interpreting the actions of the US Federal Reserve. Although it is possible to cut interest rates in July, the market will experience repeated confusion and certainty in the process, which is also part of the macroeconomic uncertainty cycle.
From the beginning of the year to the present, the market has experienced a shift from focusing on inflation to focusing on micro company performance, but now it needs to return to macroeconomic factors. The state of the U.S. Federal Reserve is worse than expected, but U.S. stocks, including U.S. bonds and gold, are rising. The Bitcoin market is pricing it right in response to this.
Rising long-term interest rates hit BTC liquid assets, making it difficult to achieve a bull market this year
The logic of US stocks and Bitcoin is different: the rise of US stocks is mainly driven by Gamma hedging and CTA, and is less affected by whether the Federal Reserve cuts interest rates. Once uncertainty is resolved, U.S. stocks tend to rise straight up.
Interest rate cuts have a greater impact on Bitcoin’s liquid assets, but it is not limited to that. Interest rate cuts affect short-term interest rates, while long-term interest rates have a greater impact on risky assets. For example, if the 10-year interest rate rises by 25 basis points, the impact of a 0.25 percentage point interest rate increase will be much greater than a single interest rate increase. The stocks of the seven largest companies are not supported by liquidity, but by gravity. For example, NVIDIA's PE has remained stable in the long term, mainly driven by the growth of earnings per share (EPS) and AI business.
Risk-bearing assets in the market are divided into current assets and long-term risk assets. Current funds are invested in bank deposits, short-term bonds, etc., while long-term funds are invested in Bitcoin, stocks, long-term government bonds, etc. When the yield on the 10-year Treasury bond is higher than the yield on stocks, investors are more likely to buy Treasury bonds than stocks. If this happens, it indicates that the market is in an advanced stage and risky assets, especially Bitcoin, will be hit hard. Rising long-term interest rates have a greater impact on all risk assets, especially liquid risk assets such as Bitcoin.
The United States began issuing large-scale debt last year, but the economy is still strong and interest rates are at 5.25-5.5%. Normally, raising interest rates would lead to a recession, but the nature of growth in the U.S. economy has changed. Economic growth relies on a weighted average of private sector and government debt.
The U.S. government continues to issue debt to support the economy, but this has also led to an intensification of the contradiction between supply and demand in the market. The DV01 of the U.S. bond market will be approximately $700 million in 2023 and is expected to increase to $1 billion this year. The Treasury Department is forced to issue long-term bonds, and the buyers of long-term bonds in the market are mainly hedge funds such as Goldman Sachs. These funds use short-term low-interest-rate funds to buy long-term high-interest-rate bonds to earn the spread.
However, the current inversion of long-term and short-term interest rates and the lack of buyers have led to insufficient demand for long-term bonds. The 10-year long-term interest rate is expected to be close to 5%, which is a huge blow to non-yielding liquid assets such as Bitcoin and gold. Bitcoin currently relies on arbitrage to survive, but with reduced liquidity, Altcoin could go to zero.
Overall, it is difficult for liquid assets to enter a bull market. Only when long-term interest rates fall, the market may turn around, but it is difficult to see such a change this year.
Once the arbitrage spread between spot ETFs and futures contracts disappears, Bitcoin is at risk of plummeting in the short term
The current rise in the Bitcoin market is mainly driven by ETF expectations. During this round of rise, a total of approximately US$15-18 billion has entered the market.
Sources of ETF buying include arbitrage funds of US$6-8 billion. Bitcoin holders of about US$5 billion transfer Bitcoin to ETFs. The long-term holding part is about US$5-6 billion, and the remaining US$3 billion is active buying. .
ETFs are centralized and specifically managed in Coinbase, which is equivalent to taking Bitcoin out of the circulation market, resulting in a reduction in supply. ETF arbitrage takes advantage of the price difference between Bitcoin and futures. When futures prices are higher than spot prices, investors can profit from buying Bitcoin in the spot market and short it in the futures market.
The trading data of CME and Binance show that CME’s holdings are relatively high, reflecting that a large number of positions are not used for daily trading, but are used for arbitrage. High premiums trigger more arbitrage activities, with arbitrageurs locking in risk-free returns by buying ETFs while short futures.
Arbitrage in the Bitcoin market drives prices higher through premiums on CEX and futures contracts. Arbitrageurs buy Bitcoin futures contracts, push up the futures premium, and then buy Bitcoin through arbitrage, forming a cycle. However, these arbitrageurs profit more when Bitcoin prices fall, because futures prices usually fall more than spot prices, and they can sell both futures and spot prices simultaneously, thereby realizing profits.
At present, the premium of Bitcoin ETF is still around 10%, which attracts more arbitrage funds to enter the market and maintains the price of Bitcoin. However, this also brings risks. Once the premium disappears, arbitrageurs may quickly exit the market, dumping ETFs and futures, causing prices to plummet.
Republican policies tend to be inflationary, which poses a major negative impact on the liquid asset Bitcoin
Republican rule is extremely detrimental to liquid assets. For example, after Trump takes office, Bitcoin will face major negative effects. Trump's policies have led to an increase in inflation. One of the main measures is to impose 60% tariffs on China and 10% on other countries, causing CPI and PCE to increase by 1.1 percentage points, directly triggering an increase in inflation.
When inflation rises, not only will interest rates not be cut, but interest rates may be raised.
In addition, Trump’s policies to control immigration have also affected inflation and the job market. There are two sources of employment data in the United States: Nonfarm Payroll, which reflects the real employment situation, and the Household Survey, which includes illegal immigrants.
There is an imbalance between non-farm employment and the unemployment rate, but the economy is still strong due to the demand brought by about 2.5 million immigrants every year and the reduction of basic wage costs. Trump’s policy will reduce the entry of at least about 500,000 immigrants, which will lead to the general The expansion rate increases.
Trump's policies tend to maintain higher inflation levels in the hope of a return of manufacturing to the United States, which is unlikely to materialize. High inflation is extremely damaging to liquid assets, such as Bitcoin, which means that after Trump takes office, a bull market in liquid assets will not be possible.
Continued issuance of long-term debt will cause long-term interest rates to rise, and the market will react with penalties
The United States will be forced to issue long-term debt in large quantities rather than selectively. The United States has strict guidelines and cannot rely entirely on short-term debt, because this is equivalent to printing money. The proportion of short-term debt allowed by the guidelines is only about 25%. Although it can be exceeded slightly, it is impossible to exceed it significantly.
The Bank of Japan holds 58% of its own bonds, maintaining a huge debt without affecting the financial system, but the United States must increase its bonds by 10% every year to maintain economic growth. If bonds are reduced and bonds are increased, the economy will immediately have a hard landing. The continued increase in U.S. bonds will inevitably lead to an increase in long-term interest rates, which will be punished by the market. Trump's policies attempt to keep the dollar weak and drive inflation, but the market will respond by pushing long-term interest rates higher. If long-term interest rates rise to 7%, 8%, or even 9%, all assets will be affected.
Unlike China, the United States cannot control long-term interest rates, which are determined by the market. Bitcoin rose in early 2023 because short-term bonds were mainly issued, not long-term bonds, which did not exceed the guidance. But now the Ministry of Finance cannot support it and must issue long-term bonds.
If the status of the US dollar is affected, global assets will face violent deleveraging and all assets will be worthless: the US dollar is the global settlement currency, and any economic crisis will eventually cause the US dollar to skyrocket, and all assets, whether gold, Bitcoin or stocks, will be shattered.
It is difficult for Bitcoin to be used as a reserve asset; if Trump takes office, the Bitcoin market may face a big market situation, so investment needs to be cautious
As a reserve asset, Crypto needs to be approved by Congress, and this process is extremely complicated. Gold has a historical role as currency and oil is a strategic resource, but Bitcoin has no similar clear purpose. Using taxpayer money to buy volatile Bitcoin requires a good reason, which is extremely difficult to pass in Congress, and the proposal of Bitcoin as a national reserve asset is almost impossible to achieve.
Bitcoin should be viewed as a macro asset, not a reserve asset. Trump’s policies are biased towards inflation, which is bad for Bitcoin. There are emotional factors in market transactions, which may be driven by good news in the short term. However, in the long term, after Trump takes office, the Bitcoin market may face a big market situation. Investors should not rely too much on short-term good news.
Hong Kong private bank Bitcoin ETF is yet to be popularized and has great arbitrage potential. ETF buying and arbitrage funds support the stability of BTC prices
Bitcoin ETFs are not yet accepted by most private banks in Hong Kong, and only a few top brokerages are able to conduct arbitrage trades. If investors operate on their own, the arbitrage efficiency of Bitcoin ETFs is very low because it involves T+2 transaction settlement and requires frequent selling of ETFs to cover positions. Effective arbitrage operations require Prime Broker operations from investment banks. The approval process for new products is long, and when new products such as ETH are first launched, arbitrage opportunities are limited.
As the bank's audit and access procedures are completed, arbitrage opportunities will increase in the future, including Bitcoin ETFs. Once private banks such as HSBC, JP Morgan and Goldman Sachs allow trading, the Bitcoin ETF will gain more buying support.
There is currently no bull market for BTC, and Bitcoin price expectations are divided into two situations. One is a bull market in which the price of Bitcoin soars to $100,000 or $150,000, driving other cryptocurrencies to surge along with it. The other is that Bitcoin prices fluctuate in the range of $50,000 to $70,000. The former is difficult to foresee, but ETF buying and arbitrage funds can support Bitcoin to remain within the latter range.
BTC is highly correlated with the US stock market, and insufficient liquidity and high interest rates inhibit the bull market in the altcoin market
BTC is highly correlated with the U.S. stock market, especially with U.S. bonds: correlation cannot be judged just by looking at the price fluctuations of the day, but should be analyzed from the nature of the asset and trading behavior. BTC has a strong correlation with risk assets, especially liquid risk assets, which are significantly affected by U.S. Federal Reserve policy and U.S. dollar liquidity.
Since 2021, the crypto has undergone tremendous changes. The introduction of USDT has made it easier for funds to flow between the crypto and the external market. Previously, funds in the crypto were circulated internally, but now the popularity of U.S. dollar stablecoins has changed this situation, and the growth of mainstream currencies such as ETH has promoted the rise of Altcoin.
As a liquid asset, Bitcoin has been compared with the U.S. stock market on the same level due to the intervention of U.S. dollar tokens. The lack of money-making effect in the Bitcoin market this year is due to the lack of liquidity and the poor long-term interest rates of the US dollar, which destroyed the previous capital circulation model.
It is difficult for Altcoin to form a bull market, mainly due to insufficient liquidity and a high interest rate environment that inhibits market activity. Bitcoin, as a liquid asset, behaves like lagging gold or unprofitable U.S. stocks. Excluding the impact of the seven major technology giants, the S&P 500, S&P 493 performed similarly to Bitcoin.
US dollar interest rates will remain high for a long period of time, suppressing the crypto; a hard landing of the economy may cause the Federal Reserve to relax its policy, which is good for the crypto
It is difficult for the crypto to have a bull market in the short term. The U.S. dollar interest rate will play a decisive role in pricing risky assets and market risk preferences. With such an increase in the scale of long-term bond issuance, interest rates will remain high for a longer period. Put pressure on liquid assets such as BTC.
Of course, the risk of a hard landing for the U.S. economy could quickly change this expectation. Although a hard fall will impact U.S. stocks and crypto assets in the short term, it will later give the Federal Reserve more reasons to intervene, which will be beneficial to crypto assets. The Fed currently has a plethora of tools to deal with a recession: from QT reduction, interest rate cuts, special lending, QE, and more.
Adjustments to Trump's policies or market expectations may trigger a major adjustment in U.S. stocks. The U.S. Federal Reserve may cut interest rates or initiate QE. Bitcoin and other assets may welcome a bull market.
There are two main reasons why the U.S. stock market may undergo a major correction: First, the U.S. economy has a hard landing. If Trump comes to power and implements inflation and deficit reduction policies, the issuance of government bonds will decrease. Once the issuance of government bonds on which economic growth depends is reduced, it will inevitably lead to a hard landing and a decline in corporate profits.
Currently, AI companies rely on the four major cloud companies for their profits, and these companies’ revenue mainly comes from advertising. If the economy hits a hard landing and advertising revenue dwindles, Meta and Google's earnings will plummet.
Second, market expectations are adjusted. Taking NVIDIA as an example, the market has extremely high expectations for its performance. If the performance fails to exceed expectations, the stock price will plummet. Similarly, although Microsoft's results were in line with expectations, earnings were slightly reduced, causing the stock price to plummet. This adjustment in expectations may occur by the end of this year or early next year, triggering a substantial market correction.
Although U.S. stocks may experience corrections of 20%-30%, they usually rebound in the short term. If the U.S. stock market plummets, the impact on Bitcoin will be devastating. Afterwards, the US Federal Reserve may cut interest rates or initiate QE, which may promote a bull market for assets such as Bitcoin, Ethereum, BNB and Solana.
The key to the valuation of a new project depends on whether it attracts investors and whether the project is unlocked after listing; big funds usually flow to BTC, ETH, BNB and Solana
The valuation of a new project mainly depends on whether it can attract the next round of investors. Most of the information on Web 3 projects is untrue, so when evaluating, focus on two key points: whether it can attract new investors, and whether the project will be unlocked after listing. There is little hope that Web 3 technology will change the market, and there are currently no projects that have been launched. The core is whether it can be listed on Binance. As long as it can be listed on Binance, there will be trading opportunities.
Altcoins will mostly go to zero, or at least drop 90%. This is mainly due to liquidity issues and lack of activity in Altcoin. A few Altcoin such as Solana can continue the matryoshka game and complete the self-return cycle.
The valuation model of the entire crypto market is similar to that of a casino. The mainstream currencies BTC, ETH, BNB and Solana are regarded as casino stocks. Faith is the key to supporting their value. Big funds usually flow to mainstream currencies. If you want to allocate assets, Solana is a good choice.
Bitcoin halving has less impact on the market, and prices are more affected by transaction volume and macroeconomic factors
Bitcoin’s four-year halving cycle has little impact on the market. Although halving will lead to a reduction in supply and increase deflationary costs, miners, as price takers, have very little bargaining power and have limited impact on Bitcoin prices. Market prices are more affected by transaction volume, macroeconomic factors and other buyers and sellers. The impact of the halving cycle is gradually decreasing, and it is unrealistic that the halving cycle will inevitably bring about a bull market.
