The most crucial aspect of the cryptocurrency industry is the cycle. In this issue, we discuss the macro trends and their impact on cryptocurrencies with Jiang Jinze, Chairman of MuseLabs and former Chief Researcher at Binance Research China. We discuss the influence of the Federal Reserve’s rate hike and cut cycles on cryptocurrencies, the impact of Bitcoin spot ETFs, the resonance between Bitcoin and Nasdaq, and the impact of the U.S. elections on cryptocurrencies. Jiang Jinze believes that from the perspective of interest rates, the possibility of a bull market continuing in the coming year is still very high.

Transcription was done using GPT, so there may be errors.

## Nasdaq’s Historical Highs and the Cryptocurrency Market’s Resonance with Nasdaq

Historically, there has indeed been a correlation between the cryptocurrency market and the Nasdaq market, but this correlation is not always stable. The correlation depends on the chosen statistical cycle: the shorter the cycle, the greater the volatility, and the longer the cycle, the smoother the correlation. For example, choosing a 365-day cycle shows that the correlation between BTC and the Nasdaq 100 usually remains above 80%.

From past trends, the cryptocurrency market was highly correlated with Nasdaq during certain periods, such as almost the entire year of 2022, until it decoupled due to events like FTX at the end of the year. The correlation resumed at the beginning of 2023, until the banking crisis in March caused fluctuations again. The cryptocurrency market typically reacts more significantly than the stock market, such as being seen as an alternative to traditional banking during the banking crisis, leading to a brief decline in correlation.

Independent events also have a significant impact on the cryptocurrency market. For example, the Ethereum upgrade in June 2023 and the SEC’s lawsuits against several projects caused market panic, leading to a drop in correlation with U.S. stocks. Last fall, the expectation of spot ETF approval led to an independent upward trend in the cryptocurrency market, while U.S. stocks were in a correction phase.

In terms of Federal Reserve policies, the volatility of the cryptocurrency market is also closely related to changes in interest rates. In early 2024, U.S. stocks rebounded due to changes in interest rates, while the cryptocurrency market reacted more slowly. Overall, the cryptocurrency market may decouple in the short term due to independent events but still shows some resonance with Nasdaq in the long term.

Therefore, the trend of the cryptocurrency market is influenced by both its application curve and macroeconomic policies. When there is no clear independent growth theme in the market, its valuation often inversely correlates with interest rates, i.e., high valuation with low rates and low valuation with high rates. Analyzing the interest rate market helps predict the cryptocurrency market trend, but relying solely on correlation is insufficient; the underlying macroeconomic and policy background must also be considered.

## The Fed’s Rate Hikes and Cuts: Impact on Crypto and Nasdaq

Indeed, the Federal Reserve’s initial rate hikes have a negative impact because the marginal change in risk-free rates is the largest, whether it’s a 50 or 5 basis point hike when the base is very low, the marginal change is significant. But as the number of hikes increases and the base grows, the marginal impact diminishes. Thus, after the hikes end, the market often rebounds and may even enter a bull market stage.

Additionally, the strong recovery in U.S. corporate earnings is a significant reason for market gains. For instance, Nvidia’s stock price, even at $800-$900, had a PE ratio lower than before 2019. This indicates that despite a 30%-40% rise in stock prices, valuations have not expanded significantly. Most of the stock price increases are driven by profit growth, matching the rise in stock prices.

Therefore, the rebound after the end of rate hikes is not unusual but a result of the reduced marginal impact and the recovery of corporate earnings.

## Is Artificial Intelligence a Significant Influence on Nasdaq?

I think artificial intelligence does not have a substantial impact on Nasdaq. Currently, AI affects stocks that can reflect performance, such as Nvidia. Microsoft, on the other hand, has investments but no revenue. U.S. stocks, even from last year to now, are speculating on stocks that have made money from AI. If a company hasn’t made money, engaging in AI could lead to a price drop.

Investors in U.S. stocks are very cautious and do not speculate on AI bubbles. For example, when Meta announced a 20% increase in computing power investment, its stock price immediately fell by more than 10% because the market was unsure when these investments would be profitable. The market is very realistic, unlike the crypto space, which speculates on concepts. For example, Google, another major player in AI, saw its stock price fall due to slower ad revenue growth.

Overall, while U.S. stock prices rise daily, the driving factor behind this is profit growth, not valuation bubbles. Although the PE ratio of U.S. stocks is at a historical high, it is hard to push it higher without significant market liquidity or speculation. In the future, if AI applications show substantial potential, speculation bubbles might appear, like driving Nvidia’s PE ratio above 100 times, but currently, the market remains relatively rational.

Regarding the crypto space, its correlation with Nasdaq is primarily due to their close relationship with interest rates rather than following each other. Cryptocurrencies are more sensitive to interest rates because they do not generate profits themselves, relying only on interest rates. Although a strong stock market sentiment is favorable, it does not directly drive the crypto space. The crypto market needs monetary policy and its new themes to drive it to new highs. Currently, the crypto space lacks an independent application cycle, making it difficult to achieve a high level of growth in one go.

## High Bull Market Likely Next Year, Risk Assets Strengthen Post Rate Hike Pause

After a pause in rate hikes, risk assets usually strengthen. Historically, after the Federal Reserve pauses rate hikes, the economic cycle often enters a recessionary period because the economy is either overheated or in recession. Rate hikes address an overheated economy, and the subsequent phase is a downturn or even recession, followed by recovery and another cycle of overheating. After a pause in rate hikes, the economy might enter a recession, prompting the Federal Reserve to cut rates upon seeing signs of recession, potentially entering a continuous rate cut channel. The early stages of rate cuts, like the early stages of rate hikes, are not necessarily good because they indicate market issues.

Currently, the market is watching economic or employment data, and if it deteriorates slightly, people will be happy, and the market will rise. However, if it deteriorates too much, people will worry about entering a recession and withdraw. Therefore, the upcoming data will be crucial.

From a broader cycle perspective, cryptocurrencies, which have multiple attributes, are essentially pro-cyclical commodities. Using PMI as an indicator of economic activity, during PMI expansion periods, cryptocurrencies usually experience a bull market. If the current economic situation can be maintained without declining, it would be the best scenario. Because once the economy starts to decline, it will follow a trend of decreasing, causing panic.

If the current economic growth can sustain a GDP growth rate of about 2% to 3%, and the stock market reaches its current level, investors might be hesitant to continue buying because valuations are already at historical highs. Although there’s no bubble, no one wants to push it to a bubble state, and slightly weaker performance will cause a decline. In this case, funds will seek other investment targets, creating more space for other assets. For example, recently, a large amount of foreign capital has flowed into Hong Kong stocks.

Ordinary investors differ from institutional investors; institutions receive new funds every year and have enough patience to make arrangements, buying more as prices fall. However, ordinary people may not save more money each year, and if their funds run out, they might have to cut losses at low points. Thus, the mentality of ordinary investors differs significantly from that of institutions.

## What Is the Final Scale of Bitcoin Spot ETFs? How Much Could Bitcoin Rise?

I think it is reasonable for ETFs to eventually reach 1% of U.S. asset management scale. Why did Bitcoin ETFs stop at about $50 billion? You can find a similar reference, such as the largest gold ETF, which also has a scale of over $50 billion. When Bitcoin ETFs reach the same scale as the largest gold spot ETFs within a month of listing, the market needs a break. The overall scale of gold ETFs is in the thousands of billions, with specific figures I cannot recall precisely, but at least over a thousand billion.

The goal for Bitcoin ETFs is to gradually match oil ETFs, then the largest gold ETFs, and eventually the overall scale of gold ETFs. When Bitcoin ETFs exceed $50 billion, the market’s imagination space opens up, moving to the next stage. Next, we can find some data to estimate the inflow of incremental funds.

The total scale of all open-ended funds in the U.S. is over $60 trillion, with potential allocation size being $9.7 trillion. If these funds allocate 1%, $97 billion will flow in, 5% is $480 billion, and 10% is $970 billion. Currently, there are only over $50 billion, which is the scale of North American and European mutual funds, excluding unlisted asset management, which are larger but difficult to estimate.

According to SEC’s 13F disclosures, the number of institutions holding BTC is increasing. In February, only a dozen funds held Bitcoin ETFs, but now more than 130 funds hold them, most of which are non-public funds. These institutions initially test the waters, and their actual allocation scale is highly likely to exceed $97 billion in the coming year.

Another estimation method is to use the total scale of global asset management, estimating incremental funds conservatively at 0.5% to 5%, corresponding to BTC prices from $170,000 to $1.7 million. This explains why some people predict Bitcoin could reach $200,000 or even $1 million. Assuming Bitcoin reaches $230,000, its market cap would be about $4.7 trillion, which is not exaggerated compared to existing asset values. However, if it reaches $1 million, the valuation would be very exaggerated. This might not be realistic in the short term, but if the asset market doubles in the next ten years, Bitcoin reaching $1 million becomes possible.

Currently, Bitcoin’s market cap is comparable to silver, and surpassing silver significantly requires some driving events. Future development depends on the allocation ratio of incremental funds and the market’s acceptance of Bitcoin.

## U.S. Election: Will Trump’s Victory Benefit Cryptocurrencies?

In the current favorable macro environment, Bitcoin is unlikely to see significant short-term gains and may fluctuate between $60,000 and $70,000. If the economy stabilizes and cools down and the Federal Reserve successfully starts cutting rates, Bitcoin is likely to see a spike, reaching between $130,000 and $170,000.

Of course, this requires a certain degree of dovishness from the Federal Reserve. For instance, the market is pricing in two 25 basis point cuts in September and December, totaling 50 basis points, which I think is insufficient for a substantial market rise. The market might expect a more dovish scenario to reach a target above $100,000.

If economic data further weakens in the next two months but not significantly, it might lead to expectations of the first rate cut by the Federal Reserve in July. If this happens, the confidence in Bitcoin reaching $120,000 to $170,000 will be higher. However, if there are only two rate cuts or less this year, it will be challenging to reach that level. Therefore, Bitcoin’s price needs the cooperation of macroeconomic and monetary policy factors to achieve substantial gains.

## When Will This Bull Market End, and Do Bull Markets Usually Last Less Than Two Years?

Historically, bull markets usually end when economic conditions are not very good. Currently, it is difficult to predict when the global economy will slump. Last year, people predicted a hard landing early this year, but the economy has performed very well. For example, the banking crisis and high interest rates have not had as severe an impact on the real estate market as expected.

Generally, Bitcoin bull markets rarely last more than two years. If we count from the low point at the beginning of last year, this bull market has already lasted over a year. By the end of this year or early next year, there might be a deep adjustment. This is just a reference and not very meaningful.

In terms of economic cycles, AI is a new variable. If AI can significantly improve productivity or create new demand, it may trigger a new wave of investment and demand, affecting economic cycle judgment. For instance, Google’s smart glasses concept, if AI is embedded in glasses for seamless collaboration, it will usher in an iPhone moment.

Another crucial factor is China’s policy. After lifting the pandemic lockdown, there was an expectation for substantial monetary easing or fiscal stimulus in China, but the rebound only lasted for two months. This year, some policies are gradually taking effect, including the central bank buying bonds and the government directly purchasing buildings, indicating potential liquidity infusion in China, boosting the market. Rising inflation expectations in China could also be favorable for Bitcoin.

The future risk lies in the growing debt burden of the U.S. If the debt burden becomes too heavy, secondary market yields might struggle to decline despite rate cut expectations. Although a U.S. debt crisis is unlikely because the Federal Reserve can ultimately intervene by buying bonds, concerns about a debt supply crisis could shake the market. For example, last fall, the U.S. Treasury yield rose to 5% mainly due to increased issuance and inflation expectations.

Overall, Bitcoin’s future trend requires consideration of multiple macroeconomic and monetary policy factors.

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