Wu Says Podcast: How Long Until the Bull Market? The Impact of the Federal Reserve, Nasdaq, and ETFs

The two most important words in the cryptocurrency industry are "cycle." In this issue, we discussed macro trends and their impact on cryptocurrencies with Jiang Jinze, Chairman of MuseLabs, a global asset allocation research institution, and former Chief Researcher of Binance Research in China. We talked about the impact of the Federal Reserve's interest rate hikes and cuts on cryptocurrencies, the influence of Bitcoin spot ETFs on cryptocurrencies, the resonance between Bitcoin and Nasdaq, and the effects of the U.S. elections on cryptocurrencies, among other topics. Jiang Jinze believes that from the perspective of interest rates, the likelihood of a bull market persisting in the coming year is still very high.

The audio-to-text conversion used GPT and may contain errors. This podcast was conducted before the Ethereum ETF approval information was released, so the entire interview and content did not consider the potential impact of the ETH ETF approval.

Listen to the full podcast:

Xiaoyuzhou:

https://www.xiaoyuzhoufm.com/episode/66475dbb251bd96e6c09851c

YouTube:

https://www.youtube.com/watch?v=lUNKxXw7Hig

Nasdaq's Historical Highs: Is the Cryptocurrency Market Resonating 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 choice of statistical period: the shorter the period, the greater the volatility; the longer the period, the smoother the correlation. For example, choosing a 365-day period shows that the correlation between BTC and Nasdaq 100 usually remains above 80%.

From past trends, the cryptocurrency market has been highly correlated with the Nasdaq during certain periods, such as in 2022, when it maintained high correlation almost throughout the year until it decoupled at the end of the year due to events like FTX. At the beginning of 2023, the correlation recovered until the banking crisis in March caused fluctuations again. The cryptocurrency market's response is usually larger than that of the stock market, as it is seen as an alternative to traditional banking during banking crises, leading to a temporary decline in correlation.

Independent events also significantly impact the cryptocurrency market. For example, events like the Ethereum upgrade in June 2023 and the SEC suing a series of projects caused market panic, leading to a decline in correlation with U.S. stocks. Last fall, due to expectations of spot ETF approval, the cryptocurrency market experienced an independent upward trend while U.S. stocks were in a correction phase.

In terms of Federal Reserve policy, 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 the impact of independent events, but it still has a certain resonance with the Nasdaq in the long term.

Therefore, the trends in the cryptocurrency market are influenced by its own application curve as well as macroeconomic policies. When there are no obvious independent growth themes in the market, its valuation often has an inverse relationship with interest rates, meaning that valuations are high when interest rates are low and low when interest rates are high. Analyzing the interest rate market helps predict the trends in the cryptocurrency market, but predictions based solely on correlation are insufficient; the underlying macroeconomic and policy context must also be considered.

The Impact of the Federal Reserve's Interest Rate Hikes and Cuts on Cryptocurrencies and Nasdaq

In fact, the initial impact of the Federal Reserve's interest rate hikes is indeed negative because the marginal change in the risk-free rate is the largest. For example, starting from a low point, whether it is a 50 basis point or a 5 basis point hike, the marginal change is significant when the base is very small. However, as the number of rate hikes increases, the base becomes larger, and the marginal impact diminishes. Therefore, after the rate hikes end, the market often rebounds, even entering a bull market phase.

Additionally, the recovery of U.S. corporate earnings has been very strong, which is also an important reason for the market's rise. For instance, Nvidia's stock price was at eight or nine hundred dollars, and its PE ratio was even lower than before 2019. This indicates that although the stock price increased by 30% to 40%, the valuation did not expand significantly. In fact, most of the stock price increase is driven by earnings, meaning that the company's earnings growth aligns with the rise in stock prices.

Thus, the rebound after the end of rate hikes is not unusual; rather, it is the result of the combined effects of reduced marginal changes and the recovery of corporate earnings.

Is Artificial Intelligence Having a Significant Impact on Nasdaq?

I believe that artificial intelligence is not having a significant impact on Nasdaq. The stocks currently influenced by AI are those that can reflect performance, such as Nvidia. Microsoft, on the other hand, is currently investing without generating revenue. In the U.S. stock market, even up to today, the stocks being speculated on are those that have made money from AI. If they haven't made money, their prices may actually drop.

Currently, U.S. stock market investments are also very cautious, and there is no AI bubble being inflated. For example, after Meta announced a 20% increase in computing power investment, its stock price immediately dropped by over ten percent because the market does not know when these investments will become profitable. The market is very realistic and does not engage in concept speculation like the crypto space. For instance, Google is also a major player in AI, but its stock price has fallen due to sluggish advertising revenue growth.

Overall, while U.S. stock prices are rising daily, the driving factor behind this is earnings growth, not valuation bubbles. Although the PE ratio of U.S. stocks is currently at a historical high, it is difficult to push it higher without significant liquidity or speculative concepts in the market. In the future, if AI applications indeed have substantial imaginative potential, speculative bubbles may emerge, such as pushing Nvidia's PE ratio above 100 times, but the current market remains relatively rational.

Regarding the crypto space, I believe its correlation with Nasdaq is mainly due to both being closely related to interest rates, rather than following each other. In particular, cryptocurrencies are more sensitive to interest rates because they do not generate profits and can only rely on interest rates. While a strong stock market is beneficial for sentiment, it does not directly drive the crypto market higher. The crypto space needs monetary policy and its own new themes to drive growth; only when these two conditions occur simultaneously is it possible to reach historical highs. Currently, the crypto space lacks an independent application cycle, which is also why it struggles to rise significantly.

The Likelihood of a Bull Market in the Coming Year is High; Risk Assets Will Strengthen After Rate Hikes Pause

After the pause in interest rate hikes, risk assets often strengthen. Historically, after the Federal Reserve pauses rate hikes, the economic cycle often enters a recession because the economy is either overheating or in recession. Rate hikes are meant to address economic overheating, followed by a downturn or recession, and then recovery, leading to another overheating cycle. After pausing rate hikes, the economy may enter a recession, and the Federal Reserve will lower rates when it sees signs of economic downturn, potentially entering a series of rate cuts. The initial phase of rate cuts, like the initial phase of rate hikes, is not a good sign because it indicates that the market is facing problems.

Currently, the market is watching economic or employment data; if it worsens, people may be pleased, and the market will rise, but if it is too bad, concerns about entering a recession may lead to withdrawals. Therefore, the data in the coming period will be crucial.

From a macro perspective, cryptocurrencies have multiple attributes and are essentially a pro-cyclical commodity. Using PMI as an indicator of economic activity, during the PMI expansion phase, cryptocurrencies are usually in a bull market. If the current economic conditions can be maintained without declining, that would be the best scenario. Because once the economic momentum declines, it will enter a downward trend, leading to panic.

If the current economic development can maintain a GDP growth rate of around 2-3%, and the stock market rises to its current level, people may hesitate and be reluctant to continue buying because valuations are already at historically high levels. Although there is no bubble, no one is willing to push it into bubble territory; rather, if performance slightly declines, the market starts to fall. In this situation, funds will seek other allocation targets, leading to greater inflows into other assets. For example, recently, there has been a significant influx of foreign capital into Hong Kong stocks.

Ordinary investors differ from institutional investors; institutions have new funds coming in every year and enough patience to build positions, allowing them to buy more as prices fall. However, ordinary people may not save more money each year, and if their funds run out, they may have to cut losses at low points. Therefore, there is a significant psychological gap between ordinary investors and institutions.

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

I believe that it is reasonable for ETFs to eventually reach 1% of the U.S. asset management scale. Why did Bitcoin ETFs stop at a scale of over $50 billion? Because you can find a similar reference, such as the largest gold ETF, which is also at a scale of over $50 billion. When Bitcoin ETFs reached a scale similar to the largest gold spot ETF within a month of listing, the market needed to take a breather. The total scale of gold ETFs is several hundred billion; I don't remember the exact number, but it is at least over a thousand billion.

The goal of Bitcoin ETFs is to gradually catch up with the oil ETFs, then the largest gold ETFs, and finally the total scale of gold ETFs. Once Bitcoin ETFs break through the $50 billion mark, the market's imagination will be opened up, moving towards the next stage. Next, we can find some data to estimate the inflow of incremental funds.

The total scale of all open-end funds in the U.S. is over $60 trillion, with a potential allocation scale of $9.7 trillion. If these funds allocate 1%, there will be $97 billion flowing in; if they allocate 5%, it will be $480 billion; and if they allocate 10%, it will be $970 billion. Currently, there are only over $50 billion, which only accounts for the scale of mutual funds in North America and Europe, not including unlisted asset management, which is larger but difficult to estimate.

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

Another estimation method is to use the total scale of global asset management to measure, taking incremental funds with a conservative allocation of 0.5% to 5%, corresponding to BTC prices ranging 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 valuations, but if it reaches $1 million, the valuation would be extremely exaggerated. While this may not be realistic in the short term, if the markets for those assets double in ten years, the possibility of Bitcoin reaching $1 million exists.

Currently, Bitcoin's market cap is comparable to that of silver, and surpassing silver significantly will require some events to boost it. Future developments depend on the allocation ratio of incremental funds and the market's acceptance of Bitcoin.

U.S. Elections: Will Trump's Return Benefit Cryptocurrencies?

I believe that under the current relatively favorable macro background, Bitcoin will not see particularly large increases in the short term, likely fluctuating between $60,000 and $70,000. If the economy stabilizes and cools down smoothly, and the Federal Reserve successfully begins to cut rates, Bitcoin is likely to experience a surge, reaching a range of $130,000 to $170,000.

Of course, this requires a certain degree of dovishness from the Federal Reserve. For example, the market is currently pricing in rate cuts of 25 basis points each in September and December, totaling 50 basis points; I believe this level of rate cuts is insufficient for the market to rise significantly. The market may be expecting a more dovish scenario to have a better chance of reaching targets above $100,000.

If economic data weakens further in the next two months, but the extent is limited, this may lead to expectations that the Federal Reserve will first cut rates in July. If this situation occurs, the confidence in Bitcoin reaching $120,000 to $170,000 will be higher. However, if there are only two rate cuts this year, or even less than that, I believe it will be difficult to reach that level this year. Therefore, Bitcoin's price requires a combination of macroeconomic and monetary policy factors to achieve significant increases.

Long-term Predictions: Where is the Turning Point for This Bull-Bear Cycle? Do Bull Markets Generally Last No More Than Two Years?

Historically, bull markets usually end when the economic situation is not very good. It is still difficult to predict when a global economic recession will occur. Last year, many predicted that there might be a hard landing at the beginning of this year, but in reality, the economy has developed very well. For example, the impact of the banking crisis and high interest rates on the real estate market has not been as severe as expected.

Generally speaking, 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. It is possible that by the end of this year or early next year, there will be a deep adjustment. This is just a reference and not very significant.

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 the assessment of economic cycles. For example, Google's concept of smart glasses, if AI is embedded in the glasses for seamless collaboration, could lead to a moment similar to the iPhone.

Another important factor is China's policy. After the pandemic restrictions were lifted, there were expectations for significant monetary easing or fiscal stimulus in China, but the rebound only lasted for two months. Some policies this year are gradually taking effect, including the central bank buying bonds and the government directly purchasing properties, indicating that China may implement liquidity measures to boost the market. Rising inflation expectations in China may also be beneficial for Bitcoin.

The future risk lies in the increasing debt burden in the U.S. If the debt burden becomes too heavy, yields in the secondary market may struggle to decline, even with expectations of rate cuts. Although the likelihood of a debt crisis in the U.S. is relatively low, as the Federal Reserve can ultimately buy bonds directly, concerns about a supply crisis in U.S. Treasuries may trigger market volatility. For instance, last fall, U.S. Treasury yields rose to 5%, primarily due to the U.S. issuing more government bonds and inflation expectations.

Overall, the future trends of Bitcoin still need to be considered in conjunction with various macroeconomic and monetary policy factors.