312 Anniversary: Major Changes in the Crypto World
The future has arrived. Even if "312" surprises us with a black swan again, please believe that Bitcoin is no longer the Bitcoin of the past.This article was published on Odaily Planet Daily, author: Ershisan Huasheng.
2020 was a special year; March 2020, in particular, can be recorded in history as the "Black March," even the stock god Warren Buffett was "continuously exclaiming that he has never seen anything like this." In a sense, March 2020 was a very important watershed in the global economic and financial upheaval. Against the backdrop of the global financial system nearly "losing control," Bitcoin led the rise of DeFi, triggering a competition between "centralization and decentralization," "deconstruction and reconstruction" of the financial system.
March 12 was also the most representative day of "Black March." On this day last year, the Dow Jones Industrial Average fell 9.99%, marking the largest single-day drop since October 1987, with the Dow, Nasdaq, and S&P 500 all entering a technical bear market; Bitcoin plummeted 38.81% from around $8,000, hitting a low of $3,858 the next day.
In the blink of an eye, the "312" of 2021 is approaching, and in this short year, the crypto world has undergone significant changes. Will history "rhyme" and spiral upward? Do holders need to be wary of black swan risks again? Are the fundamentals of crypto finance different? This article will review and sort out the important changes in the crypto market over the past year, reveal the deep reasons driving its development and rise, and attempt to answer these three questions.
Bitcoin in the Macro Changes
In 2020, the global financial market witnessed many "never seen before" events: In early February 2020, the COVID-19 pandemic broke out globally; on March 2, the Federal Reserve urgently cut interest rates by 50 basis points, leading to a wave of "rate cuts" from central banks around the world; on March 6, OPEC and Russia failed to reach an agreement on production cuts, and Saudi Arabia initiated a price war, causing international crude oil prices to plummet to negative values due to the pandemic's impact, leading to a situation where "a barrel of oil was more expensive than oil"; the U.S. stock market experienced four circuit breakers within two weeks, and even Buffett couldn't help but exclaim, "I've lived 89 years and have never seen such a scene"; affected by the U.S. stock market crash, dozens of countries around the world issued short-selling bans…
During this period, Bitcoin staged a reversal. Bitcoin first experienced the "312 crash," halving its price within two days. On March 23, the Federal Reserve announced a broad and unlimited quantitative easing measure on top of its earlier $700 billion bond purchase plan. Subsequently, Bitcoin and global assets began to stabilize and rise gradually, even reaching new highs. The following chart shows the price increase of Bitcoin in 2020 and the major events related to it. Readers can clearly see the relationship between Bitcoin's price and "news."
Grayscale Q4 Financial Report Data
Entering the new year, the world economy seems to still be shrouded in the gloom of 2020. Although vaccines are gradually being rolled out, the virus strains continue to mutate, and there are still no signs of completely curbing the COVID-19 pandemic, meaning the recovery of the world economy will still take some time. On March 7, 2021, the U.S. Senate passed a $1.9 trillion COVID-19 relief bill amendment, and a wave of monetary easing is about to surge. Federal Reserve Chairman Powell recently made remarks about "watching from the sidelines": The Fed will not raise interest rates until it achieves a 2% inflation target and restores full employment.
Since the moment the Fed began its monetary easing, the stock market has ceased to be a barometer of the economy and has become a barometer of liquidity. Looking at global financial assets, bubbles are everywhere; under such massive liquidity, we will undoubtedly see the rise of various new assets. Data from crypto research platform Glassnode in April 2020 showed that under the unprecedented inflation and loose global monetary policy, the number of new investors entering the Bitcoin market has increased parabolically. If this trend continues, Bitcoin's performance under the $1.9 trillion monetary easing in the U.S. in 2021 is still worth looking forward to.
Turning the timeline back to January 3, 2009, Satoshi Nakamoto wrote in the Bitcoin genesis block: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks."
On March 7, 2021, the U.S. Senate passed a $1.9 trillion COVID-19 relief bill amendment, with a House vote scheduled for this week. One of the founding fathers of America, Thomas Jefferson, once said: "In every country that issues paper money, it is possible for that paper money to be abused, has been abused, and will always be abused." Against the backdrop of a macro financial system increasingly mired in a quagmire, deflationary assets like Bitcoin are becoming more popular. Perhaps when many asset bubbles burst, Bitcoin may become a safe haven.
The Competition Between Bitcoin and Gold
Bitcoin has long been referred to as "digital gold," but at that time, BTC and gold were hard to compare. Before August 2020, Bitcoin's price movements were relatively correlated with gold, but afterward, Bitcoin and gold seemed to have entered a competition.
BTC surged upward, while gold continued to decline. After gold prices broke through $2,000 in August 2020, it entered a downward trend, currently maintaining around $1,700. In August 2020, BTC reached a peak of $12,448, and after a brief adjustment, Bitcoin continued to rise sharply, currently standing above $50,000, with a market cap exceeding $1 trillion.
Goldman Sachs' latest report shows that as of March 4, 2021, Bitcoin's return this year is about 70%, roughly double the 35% return of the energy sector, which follows closely behind. Furthermore, the report's chart indicates that Bitcoin has outperformed all major traditional asset classes so far this year.
Goldman Sachs Report Data
The divergence in the trends of gold and Bitcoin is primarily due to institutional investors beginning to reduce their holdings in gold and increase their holdings in Bitcoin. Grayscale's assets under management rose from $2 billion at the beginning of the year to $20.2 billion by the end of 2020. The buyers of Grayscale's trust products mainly include crypto asset lending companies, hedge funds, mutual funds, private wealth companies, consulting firms, family offices, and more.
On November 9, 2020, JPMorgan Chase reported that Bitcoin is eating into the demand for gold ETFs. Institutional investors, such as family offices, view Bitcoin as a digital substitute for gold, and their demand for Grayscale's Bitcoin trust exceeds the total demand for all gold ETFs.
Bloomberg released a March report titled "Bloomberg Crypto Outlook", in which Bloomberg stated: In 2020, Bitcoin's volatility continued to decline, while the volatility of most other assets increased. As we enter 2021, we see nothing that can stop Bitcoin from replacing "traditional" gold. It may just be a matter of time before Bitcoin replaces gold. The following chart compares the volatility of the Gold-Bitcoin Index with that of the S&P 500 Index:
Bloomberg Intelligence Data
Bloomberg Intelligence analysis shows that the 260-day volatility of the Gold-Bitcoin 75/25 Index has reached its lowest level, and it is 20% lower than the same risk measurement indicator of the S&P 500 Index, a similar situation that occurred in early 2016. Generally, the 260-day correlation indicator between Bitcoin and the stock market is usually negative, but it reached 0.34 in early March, the highest value to date. As the Federal Reserve implements quantitative easing to boost GDP, the Gold-Bitcoin Index price is expected to receive more sustained support.
Will Bitcoin eventually replace gold? Gold has existed for thousands of years, and its historical status in traditional society is indeed unshakeable. However, human society is undergoing a massive migration to the internet, entering the digital age. Many of our lifestyles have already begun to migrate online. New technologies such as artificial intelligence, the Internet of Things, cloud computing, and blockchain are rapidly developing and reshaping society. In this process, big data has become a new means of production, and decentralized collaboration is changing the original production relationships and methods. Bitcoin, as a native asset of the digital age, is naturally more suitable than gold to serve as a store of value. In the development of decentralized finance (DeFi), BTC inherently plays the role of a store of value. The following chart shows the changes in BTC's locked value in DeFi:
Oklink Data
In the development of DeFi, BTC is closely linked to it. As blockchain technology matures, BTC will also be applied in more scenarios, thereby strengthening its function as a store of value. As BTC's volatility increases, it will gain recognition from more institutions and even countries. Grayscale pointed out in its Q4 2020 report that the latest guidance from the U.S. Office of the Comptroller of the Currency (OCC) indicates that U.S. banks may consider incorporating digital currencies into their settlement infrastructure. In 2021, we may see digital currencies begin to be integrated into the national banking infrastructure.
The Rise of DeFi, Impacting the Original Financial System
The connection between blockchain technology and the financial sector is the closest. Early DeFi explorers include Bitshare in 2014 and MakerDAO in 2017; however, before 2020, the development of DeFi was indeed slow. It wasn't until 2020 that DeFi experienced a major explosion.
To further refine, until March 2020, DeFi was not favored by the mainstream crypto market; at that time, Bitcoin's halving every four years was the focus of more people's attention. However, after the "312" crash, the global financial market and economic fundamentals became "disconnected," leading to significant concerns about the financial sector, and financial innovation became a new trend, providing DeFi with a rare opportunity for development.
We believe that after the "312" crash in 2020, the development of DeFi can be roughly divided into four periods:
DeFi Adjustment Period (approximately March-April). The crypto market crash disrupted the original rhythm of DeFi development, during which some leading DeFi projects entered an adjustment period and basically returned to pre-crash levels. A representative example is the oracle leader LINK.
DeFi Innovation Growth Period (mainly from May to August). Numerous financial innovations emerged in the DeFi space, driving rapid growth. In mid-April, the decentralized lending leader Compound launched its governance token COMP, allowing both lenders and borrowers to earn governance tokens by providing lending and borrowing assets, greatly stimulating market participation and bringing in a large amount of idle funds. At the same time, the decentralized exchange Uniswap rose rapidly, using the constant product model, allowing users to directly exchange tokens in the liquidity pool, changing the previous order book trading model, lowering the market-making threshold, and providing further application scenarios for funds in Compound (such as trading and earning market-making fees). Subsequently, the wealth management platform Yearn.finance emerged, utilizing smart contracts to develop features like the "vault," maximizing profits from idle funds. These three leaders initially established the infrastructure template for DeFi, and more projects expanded and developed on this basis, leading to a prosperous DeFi ecosystem.
DeFi De-bubble Period (approximately September-November). Before DeFi, many mining coins and trading mining models emerged, but most experienced a brief boom followed by a crash due to a large number of speculators arbitraging, leading to a death spiral in coin prices. The same was true for DeFi during this phase, where most leading DeFi projects experienced sharp declines. It is worth mentioning that the locked value in DeFi did not decrease significantly during this period, and leading DeFi projects began to rebound from the bottom, stabilizing their prices.
DeFi Explosion Period (starting in December). After significant growth driven by financial innovation, DeFi indeed faced adjustment demands, but more importantly, it was constrained by the bottlenecks of blockchain technology, with high gas fees being the most criticized issue, and the progress of Ethereum 2.0 being relatively slow. However, by December 2020, Layer 2 solutions became a lifeline for DeFi. For example, one of the Layer 2 leaders, Loopring, became another Google-cooperating project after Chainlink and Hashgraph, becoming the first zkRollup application case recommended by Google. Loopring's decentralized trading protocol based on zkRollup increased throughput by 1,000 times while reducing costs by hundreds of times, bringing great confidence to the market. Subsequently, projects like Synthetix and Sushi announced their entry into Layer 2, and the DeFi + Rollup solution became a major hope and hot topic in the market. At the same time, scaling public chains like Cardano, Near, and Solana, as well as cross-chain leaders like Polkadot, also ramped up efforts, reigniting market hopes. DeFi began to comprehensively advance into CeFi from both financial innovation and technological innovation dimensions, continuously capturing market share.
The above chart shows the top ten cryptocurrencies in the current market. Among the top ten, UNI and LINK are leading DeFi projects; ADA and Polkadot are leaders in high-performance scaling and cross-chain solutions; platforms like BSC can be classified as Ethereum sidechains, mainly benefiting from the overflow of value from Ethereum. This also indirectly reflects an important characteristic of this bull market: financial innovation in DeFi and technological innovations such as scaling are undoubtedly the main focus of capital and recognized development directions.
Before 2020, DeFi was not significant; after 2020, DeFi has begun to impact the original financial system. In this process, the development of DeFi has also attracted the attention and concerns of governments and regulatory agencies.
On December 17, 2020, the CFTC released an introductory reading on the cryptocurrency industry, stating that DeFi and cryptocurrency governance have become one of the CFTC's focus areas in the digital asset field. CFTC Chairman Heath Tarbert has openly stated that U.S. regulation is lagging behind the development of cryptocurrencies and blockchain.
On January 4, 2021, the U.S. Treasury Department's Office of the Comptroller of the Currency (OCC) announced on its official website that it would allow U.S. banks to use public blockchains and dollar stablecoins as settlement infrastructure in the U.S. financial system.
In January 2021, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury, proposed requiring banks and money service businesses to record transactions involving private cryptocurrency wallets. Since DeFi applications primarily rely on wallets as entry points, FinCEN's move may aim to begin regulating DeFi and similar areas.
The U.S. tax season is approaching. Most Americans believe that the IRS has not provided sufficient guidance for taxpayers on how to report their cryptocurrency income, especially regarding reporting on DeFi innovations. On March 9, 2021, the IRS launched an initiative called "Operation Hidden Treasure," aimed at tracking unreported cryptocurrency transactions to hold potential tax evaders accountable.
For regulatory agencies, the rapid development of DeFi has significantly changed the original regulatory paradigm. In the DeFi space, many concepts still lack clear definitions, such as how to define the asset attributes of its tokens and how to tax "staking rewards." If these definitions are still lacking, then regulation and taxation will naturally face numerous issues. Additionally, the highly decentralized and globally circulating nature of crypto assets further complicates regulatory challenges.
Essentially, the development of DeFi was born out of a crisis facing the global financial system. The development of DeFi is the result of mutual promotion between financial innovation and technological innovation. This is an important development direction in the digital age, a financial force that no country can ignore or block. However, how DeFi can be utilized by governments and how it should be regulated are urgent issues that government regulatory agencies need to face, marking the beginning of DeFi's reshaping of the traditional financial system.
Outlook
Due to the COVID-19 pandemic, people have begun to accept and adapt to contactless or low-contact lifestyles for over a year. While this has caused many inconveniences, it has also become a catalyst for the digitalization process, significantly accelerating its pace. For example, in China, even elderly people who previously did not know how to use smartphones have had to start learning how to scan codes for registration. It can be said that the pandemic has prompted the traditional lifestyle and digital lifestyle, which were originally parallel, to begin to attempt to merge.
Although the global economy has suffered a significant blow, industries such as artificial intelligence, 5G, the Internet of Things, and blockchain have experienced rapid development. The fourth industrial revolution, with data as an important means of production, has risen rapidly, and humanity's migration to the internet has never been so grand. Grayscale's report titled “The Wealth Transfer Drives BTC to Become a Mainstream Investment Target” points out that the digital age has arrived, and over the next 25 years, $68 trillion in wealth will be transferred to the younger generation inclined towards digital currency investments, which presents a tremendous opportunity for Bitcoin.
The future is here; even if "312" sees another black swan, please believe that Bitcoin is no longer the Bitcoin of the past.
