Bitcoin was born on October 31, 2008, becoming the first successful cryptocurrency in history. From the beginning, Bitcoin harbored a mockery of the third-generation monetary policy, and many people have always expected it, hoping that it will become a new tool for hedging sovereign credit risk. However, after the collapse of global financial assets, Bitcoin suffered a “Black Friday” collapse on March 13, and people began to be disappointed and doubtful about the prospects of Bitcoin.
In this crisis, has Bitcoin’s attributes as a quasi-currency changed? After carefully analyzing the short-term and long-term performance and interdependence of various assets, I observed that, contrary to popular belief, the particularity of Bitcoin was strengthened in this liquidity crisis, and its Relevance reached a record high.
1. The correlation with gold hits a record high
During this global market crash, Bitcoin’s performance in the first quarter far outperformed other risky assets, such as the S & P 500. It can be concluded that the global liquidity crisis in March 2020 accelerated the maturity of bitcoin as a quasi-currency: although bitcoin has only a short 10-year history, the price is transparent and not affected In a market with limited limits, meltdowns, or third-party supervision, Bitcoin completed the deleveraging of the market in a two-day plunge and established a new long-term bull market start.
At the same time, after the liquidity crisis, the correlation between Bitcoin and gold rose to a record high, reaching 49.2%. On the other hand, its correlation with SPX is also increasing, but its correlation with gold is more obvious. Therefore, Bitcoin should now be called “Crypto gold” more than ever in history.
The liquidity crisis led to the sell-off of bitcoin, leading to a plunge in prices
The short-term performance of Bitcoin is affected by the S & P 500 index, which is consistent with its short-term performance in the fourth quarter of 2018: the subsequent rapid rebound of the S & P 500 index also led to a short-term bull market for Bitcoin.
The current trend of Bitcoin reminds us of the performance of gold after the 2008 financial crisis. After correcting the short-term liquidity crisis and the quantitative easing actions taken by the global central bank, market liquidity was restored. Due to the continued increase in the money supply, gold has entered a longer rising channel.
Therefore, I think this liquidity crisis is not only a test of Bitcoin, but also an opportunity to accelerate its maturity to become a true quasi-currency. It is expected that Bitcoin will be invested by more institutions and individuals as “Crypto gold” against inflation expectations.
2. Hedging sovereign credit risk
During the last liquidity crisis, there was a lot of controversy about Bitcoin’s safe-haven assets, and soon some conclusions were reached: Bitcoin is not a safe-haven asset. However, the argumentation process of these conclusions often lacks data support. Here, our researchers propose the following dismantling analysis:
The hedging nature of Bitcoin is similar to another quasi-currency, gold. However, in the face of this liquidity crisis, various safe-haven assets, including US bonds and gold, showed signs of selling in the short term. The only exception is the US dollar.
The root cause is the crude oil plunge and market panic caused by COVID-19, which quickly led to changes in the risks in the balance sheets of major commercial banks and primary dealers, which cut off the credit intermediary role of banks in the short term and led to the money supply The volume, especially the supply of US dollars, is rapidly decreasing. We have observed that during the liquidity crisis, even the prices of traditional safe-haven assets (such as US bonds and gold) have experienced a rapid decline.
After the Federal Reserve announced “infinite” quantitative easing and lowered banks’ requirements for SLR, the global money supply began to rebound. As shown in the figure below, the current increase in the money supply is not only limited by the expansion of the Fed ’s balance sheet, but also by the credit intermediary channels of commercial banks, which will produce a canal congestion effect similar to the USDT premium.
Even though the Fed is expanding its balance sheet, due to insufficient capacity of commercial banks, the money supply has dropped by 3 trillion US dollars. In order to obtain sufficient liquidity or margin requirements, institutional investors will first liquidate high-liquidity assets, so sell bitcoin currency. Due to the previously accumulated arbitrage open interest contracts, in the highly leveraged Bitcoin market, this triggered a death spiral sell-off.
We should also see the positive aspects of this incident. No other asset in the world can complete deleveraging within 2 days, and deleveraging will have an important role in promoting the healthy development of the market in the long run.
Our conclusion is that Bitcoin is still a safe-haven asset, but what can be hedged is political risk, sovereign credit risk and credit currency risk, not liquidity risk.
3. Sensitive reaction to monetary policy
Bitcoin was born during the financial crisis in 2008. This is a rebellion against traditional finance and an effective hedge against the new generation of monetary policy (also known as quantitative easing) established ten years ago. Then, between Bitcoin and the global money supply The relationship is a basic relationship. After analysis, we found that Bitcoin and the global money supply have the same strong trend. Because Bitcoin has extremely high liquidity and the current number is very small, its sensitivity to monetary policy is Inferior to US bonds, gold and the US dollar.
On May 12, Bitcoin successfully completed its third halving. Generally speaking, the 18 months after halving is the traditional Bitcoin bull market. As shown in the figure below, we noticed that a violent deleveraging event usually occurs during the halving of Bitcoin, and this time before the halving (“313” event). After severe deleveraging, Bitcoin will usually enter a bull market phase, which will last longer, as shown by the red to yellow dot matrix, which is 0-18 months after halving.
After drastic deleveraging, Bitcoin usually enters a bull market phase.
Let us wait and see the consequences of halving 2020!
This article is reproduced from Fortune Chinese. The author is Yang Zhou, the founder and CEO of PayPal Finance.