Written by Babywhale, Techub News
August 5, 2024, is destined to go down in history. With the July non-farm payrolls data in the United States falling far short of expectations and the unemployment rate unexpectedly soaring last weekend, the market began to worry that the US economy would fall into recession. After a short period of "peace and tranquility" over the weekend, Asian financial markets were bloodbathed as soon as they opened on Monday. Japanese and Korean stock markets triggered circuit breakers one after another, and Bitcoin fell from nearly $60,000 at 4 a.m. today to $49,000.
Asset prices usually rise slowly, one step at a time, but often a one- or two-day drop is enough to reverse months or even years of gains. Will the short-lived “bloodbath” in the financial market this time reverse as quickly as it did in early 2020, or will it continue to fall?
Bitcoin falls below $50,000, Japanese and Korean stock markets trigger circuit breakers
Let’s first review what happened on the morning of Black Monday.
At 9 o'clock this morning, Bitcoin crashed from $56,000 to around $52,000. After a brief consolidation, it continued to fall and fell to $49,000 after 2 o'clock in the afternoon.
According to Coingalss data, as of the time of writing, the cryptocurrency market has seen over $1.1 billion in liquidations in the past 24 hours, including $382 million in Bitcoin and $356 million in Ethereum. Nearly 290,000 positions were ruthlessly wiped out by the market, with the largest single liquidation occurring on Huobi, where a total of $27 million worth of Bitcoin-based contract positions were forcibly liquidated.
The traditional financial market is not doing well either. Today, the Asian, European and Australian stock markets have all suffered bloodbaths, including (the following data source is Jinshi Data ):
- South Korea's KOSPI index closed down 8.78%. The intraday decline widened to 10%, marking the biggest single-day drop since October 2008. The circuit breaker mechanism was triggered at one point during the session.
- The Nikkei 225 Index closed down 12%, having plunged 15% during the session; the Topix Index closed down 13%, both of which triggered a second suspension. The Nikkei 225 Volatility Index rose 132%, setting a new single-day record.
- India's NIFTY and SENSEX indices both fell 3%. India's stock volatility index rose 52%, the biggest gain since August 2015.
- Taiwan's weighted index closed down 8.35%, its worst single-day performance ever. Australian stocks closed down 3.6%, its worst performance so far in 2020.
- The Turkish stock market triggered a market-wide circuit breaker mechanism after opening, followed by a secondary circuit breaker.
- European stock markets opened sharply lower, with Germany's DAX and Euro Stoxx 50 down 3% and Italy's FTSE MIB down 4%.
There were early signs of risk, but the market selectively ignored them
The Fed's July interest rate decision was to keep interest rates unchanged, but Fed Chairman Powell has almost clearly signaled a rate cut in September at the subsequent press conference. As long as there is no major surprise in the August data, a rate cut in September is almost certain. The market generally prices this rate cut as a "defensive rate cut", that is, although inflation has not returned to the expected value, it has a clear downward trend, and the unemployment rate has begun to decline, so a rate cut is needed to stabilize employment. At the same time, even if inflation rebounds slightly, it is still within a controllable range.
Just when the market was immersed in the fact that the US economy was still strong and this rate cut would further release liquidity, the actual data gave everyone a blow. On Friday night Beijing time, on Friday morning local time in the United States, the seasonally adjusted non-farm payrolls data released by the United States in July was 114,000, far below the expected 175,000; in addition, the unemployment rate in July also rose to 4.3% beyond expectations, officially triggering the "Sam's Rule" (when the three-month moving average of the US unemployment rate is 0.5% or more higher than the lowest point in the past 12 months, it indicates that the United States has entered the early stages of a recession).
Although some Federal Reserve officials subsequently made remarks such as "The non-farm data is not ideal but still within a reasonable range" and "Although a recession is likely to trigger 'Sam's Law', triggering 'Sam's Law' does not necessarily mean that an economic recession has occurred", the market still chose to vote with its feet. The S&P 500 index fell nearly 2% in a single day, the Nasdaq fell more than 2%, and Bitcoin also fell to around US$61,000.
The S&P 500 fell on Thursday and Friday
Looking back over the past few months, although global stock markets, including the U.S. stock market, have performed well, there are actually many points that deserve our vigilance, which may have been selectively ignored due to the high market sentiment.
First, Berkshire Hathaway has been cashing out stocks to increase its cash reserves since the beginning of this year, which shows that the person who may be the most knowledgeable about investment on the planet has begun to hedge in advance. Buffett also said at the first quarter shareholders' meeting (when Berkshire Hathaway's cash reserves were close to $200 billion) that they would not use this money unless they saw opportunities with low risks and high returns. And just last Saturday Beijing time, Berkshire Hathaway's financial report showed that it sold nearly half of its Apple shares in the second quarter, and its cash reserves reached a record high of $277 billion.
When the US unemployment rate for June was released in July at 4.1%, warnings were heard in the market, because it was only one step away from triggering the "Sam's Law", and some analysts began to believe that the Fed should start cutting interest rates in July to prevent a possible recession due to the lag in data. Unfortunately, such warnings were drowned out by subsequent data such as GDP that exceeded expectations.
Now let's go back to March 19 this year. After the monetary policy meeting, the Bank of Japan decided to raise the benchmark interest rate from -0.1% to 0%-0.1%. This was Japan's first interest rate hike since 2007, marking the end of Japan's long-term ultra-loose policy aimed at stimulating the economy. However, after this rate hike, the USD/JPY suddenly rose, even breaking through 160 at one point, which may be one of the reasons why the market did not pay much attention to the highly representative move of the rate hike.
On July 31, when it was generally expected that Japan would continue to maintain the previous interest rate, the Bank of Japan raised the interest rate by 15 basis points beyond expectations, raising the interest rate to 0.15%-0.25%, and this move obviously increased the panic in the market. Peter Berezin, chief global strategist and research director of BCA Research, who previously worked at Goldman Sachs and the International Monetary Fund, said as early as when the Bank of Japan raised interest rates in March, "In modern financial history, no single indicator is better at predicting when the next global economic recession will begin than when the Bank of Japan starts to raise interest rates."
If you think that all this macro-level information may not completely influence the trend of Bitcoin, then I will provide a very obvious risk signal that is worthy of attention and can be seen from Bitcoin's performance alone: Bitcoin has attempted to break through and stabilize at 70,000 for six consecutive times this year, but all ended in failure. If you ignore such an obvious signal, then I can only say that you may be a little bit obsessed.
Back to Bitcoin, although there must be a "culprit" for the plunge, in fact, before today's plunge, Bitcoin had already shown a clear downward trend. So the problem to be solved now is whether there is a logic that can be used to judge the general trend of Bitcoin in the general direction, and can explain the trend of Bitcoin in recent years. The author here provides an idea for your reference.
"A pure risk asset that does not require fundamentals"
Before explaining the basic logic that Bitcoin may follow, I have a few words to say.
First of all, I hope that if there has been no such thing in the past, from today on, all so-called "institutional views" will be blocked. Most of the public views of institutions are based on their own interests. I believe that everyone has seen in various media that many so-called institutions have been crazy about bitcoin's rise in recent months. If even a non-professional investor like me can find the many risk factors listed in the previous section, these institutions should be more sensitive than me.
As for why they choose to ignore all this and blindly shout for more, we have no idea. It may be to attract attention, to stimulate retail trading, or to attract investors to buy their paid products. But the core point is that "all the free gifts of fate are secretly marked with a price." You can use other people's opinions as a reference, but don't be led by the nose.
Furthermore, I hope that readers can distinguish the difference between "investment" and "trading". Most of you claim to be investing, but in fact you are trading. What is investment? In my humble opinion, it should be to judge the macro trend and choose investment targets according to the trend, and leave the market when there are signs that the trend logic fails. For example, in 2020, the United States launched unlimited QE and global inflation is coming. At this time, you should choose to invest in risky assets; for example, the recent geopolitical situation is tense, and you should buy gold for hedging when the Russian-Ukrainian war broke out two years ago.
What is trading? The author believes that most of the time in the current Crypto field, only trading can be done, because the project has basically no fundamentals, the income and expenditure of the foundation is unclear, insider information is not regulated, and there is almost no soil for investment. The so-called investment research is just to analyze market sentiment, which is essentially for trading.
Back to the point, the judgment framework proposed by the author is based on a basic assumption, that is, the current world financial market defines Bitcoin as a risk asset purely used to hedge inflation, and there is no need to judge any fundamentals, which can be understood as the opposite of gold. In other words, gold is a pure safe-haven asset that is not affected by fundamentals such as revenue, profit, and industry prospects like listed companies, while Bitcoin is a pure risk asset without these fundamental interferences.
When did this definition begin? I think the time when the evidence can be clearly seen should be from March 12, 2020. Now let's start from that day and use this set of logic to re-examine the market trends to date.
From March 12, 2020 to April 14, 2021, the Federal Reserve launched unlimited QE after a rapid rate cut. A large amount of hot money entered the market, pushing up U.S. stocks. Some of the hot money flowed into the cryptocurrency market. Combined with the phenomenal concept of DeFi, Bitcoin soared from around $3,800 to nearly $65,000. As a pure risk asset, the result of the dollar printing money and the rise in Bitcoin prices is obvious.
From April 14, 2021 to May 19, 2021, Bitcoin fell from nearly $65,000 to a low of $30,000. This was naturally due to factors such as the need for a correction after excessive increases, the panic caused by China's ban on Bitcoin mining on May 19, and the exaggerated overall market leverage level.
But I would like to remind you that many people had not started to pay attention to the macro economy at that time. In fact, before the announcement of the interest rate decision in April 2021, the market began to partially price in the Fed to start raising interest rates in May or even April to curb the overheated economy because of the skyrocketing US housing prices and the gradual expansion of the US stock bubble. Although the Fed was dovish in April, the market has actually smelled the smell of hyperinflation. At this time, as a Bitcoin trader, you have actually begun to worry that the Fed will suddenly raise interest rates. The few days before 519 that could not break through 60,000 actually gave a very obvious signal of market divergence. The subsequent decline on May 13 basically confirmed that the risk-averse sentiment has exceeded the mindless rush sentiment, and there is no need to say more about what happened afterwards.
So how do we explain the subsequent high of $69,000 and the subsequent drop to around $15,000?
Everyone knows that the Federal Reserve started to raise interest rates in March 2022, but in fact, Powell had already started expectation management a few months in advance. The market already knew that the interest rate hike was not far away, so it reacted in advance. This is probably the biggest factor affecting Bitcoin's failure to soar to the sky after breaking through the new high of $65,000, but stopping at $69,000. Subsequently, because the Federal Reserve has made it clear that it wants to control inflation, Bitcoin began to fall all the way. In fact, in 2022, at least according to the data, inflation continued for a period of time, but because of the expectation that "inflation will be quickly suppressed due to the Fed's aggressive interest rate hikes", Bitcoin has no motivation to rise. Of course, this is also superimposed on extreme situations such as the collapse of Terra and the bankruptcy of FTX. Perhaps without these situations, Bitcoin would not fall to around $15,000, but the downward trend is inevitable.
The bear market is easy to explain, but the most difficult to explain is actually the rise of Bitcoin from around $30,000 to a new high in 2021 and the bull market that lasted from the second half of last year to before. If the previous explanations are based on "expectations", these two trends need to be superimposed with "facts".
The rise in the second half of 2021 occurred against the backdrop of the market discovering that Powell really had no intention of cutting interest rates and that inflation continued to ferment. In other words, the two factors of "no interest rate cuts in the short term" and "inflation still exists" pushed Bitcoin to new highs.
Many people believe that the previous bull market was caused by the expectation of interest rate cuts, which led to optimism about future liquidity. I have said more than once in public that as long as interest rates are confirmed to be cut, Bitcoin will definitely fall, because whether the interest rate cut is due to a decrease in inflation or economic problems, the "inflation" factor that needs to be hedged no longer exists.
Based on this, the main driving force behind this round of Bitcoin-specific bull market is that inflation still exists, the Federal Reserve has no clear interest rate cut plan, and the Bitcoin spot ETF provides a tool for a large number of institutions or funds that have no way to directly invest in Bitcoin spot to invest in "pure inflation hedge assets." Therefore, I dare to say that even if there is no Bitcoin spot ETF, Bitcoin will still rise before, but whether it will rise to 70,000 is unknown.
In the short term, Bitcoin has risen rapidly after Trump was shot. Many people believe that this is because Trump's chances of being elected have increased, and he attaches great importance to cryptocurrencies, which has led to market optimism, but this is only half right. It is true that Trump's chances of being elected have increased, but the deeper reason is that Trump's anti-globalization policy is likely to lead to higher inflation in the United States, and the market is actually trading on this expectation.
The reason why it fell again afterwards was also because even if Trump takes office next year, it is also a fact that inflation is currently declining.
The author does not dare to guarantee that the above content is correct, but given that this logic can explain the direction of all market developments (the specific magnitude may be related to events and market sentiment), the author believes that it has certain reference value.
As for the future, according to this logic, as long as the interest rate cuts continue, Bitcoin will most likely maintain its downward trend. When the decline ends and the rise begins again depends on whether an economic crisis will occur in the future, causing the Federal Reserve to once again launch a larger-scale quantitative easing, thereby triggering inflation again; or whether this plunge is just an emotional panic. After and during the continuous interest rate cuts by the Federal Reserve, there has not been a large-scale global economic recession. Instead, the economy has gradually improved or even developed at a faster pace. These will be important factors affecting whether Bitcoin can restart its rise in the future.
