At present, the short-term correlation between Bitcoin and U.S. stocks (S&P 500) has reached an unprecedented high, and the fractal similarity between the price K-lines of the two can even be reduced to the minute level. Many people can’t help but wonder if it is Bitcoin’s underlying narrative and Has the value proposition changed? (Recap:U.S. stocks are mixed, Bitcoin is hovering at 30,000 magnesium; Musk: The U.S. economy is “probably” in recession, or lasting 12-18 months )
Based on history, the long-term correlation between Bitcoin and the S&P 500 generally remains between -15 and 15, and the average correlation is close to zero, that is, irrelevant. However, during the financial market liquidity crisis caused by the outbreak of the new crown in 2020, The two have had a fairly high correlation for some time.
In fact, not only Bitcoin, but even bonds, commodities, and gold have significantly increased their correlation with stocks during this period. This is actually caused by liquidity migration. During the period of liquidity migration, the correlation of financial assets will be significantly increased.
For liquidity migration, let’s refer to the exter pyramid model, a model proposed by the late John Exter, vice chairman of the Federal Reserve Bank of New York, to organize financial assets according to risk and corresponding liquidity.
The model shows that the closer the asset is to the upper layer of the liquidity pyramid, the higher the asset return, the higher the risk, and the smaller the liquidity.
The closer the asset is to the lower layer of the liquidity pyramid, the lower the asset return, the lower the risk, and the higher the liquidity. The base of the pyramid narrows, as it becomes harder for assets to increase supply the further down they are.
The current high correlation between Bitcoin and U.S. stocks is actually caused by the top-down liquidity migration of the pyramid. Although the Federal Reserve has not yet begun to shrink its balance sheet, inflation has been hovering at a high level.
Further reading:Biden supports Ball’s “tightening currency” to fight inflation; Fed director: Every next meeting should raise interest rates by 2 yards!
The trend of easing is not seen in the short term, and the market’s expectations for liquidity crunch (interest rate hikes and balance sheet reductions) are already full. This tightening expectation has accelerated the downward migration of liquidity, and investors have sold risky assets at high levels in the pyramid (commodities, Stocks, Bonds, Bitcoin), acquire bottom-of-the-pyramid assets (fiat and gold) to preserve wealth and liquidity.
This will lead to a downward spiral of negative returns, selling risky assets – risky assets falling – investors passively deleveraging – risky assets falling further, and the process of liquidity migration is the process of financial assets falling and deleveraging. In the process, the correlation between the two is strengthened by the arbitrage of volatility by a large number of quantitative robots.
How long this correlation will last is unknown, but it is foreseeable that this correlation will gradually weaken regardless of whether the current liquidity crisis in financial markets continues.
To better illustrate this point, we divide Bitcoin investors into two types, one is old money, based on fiat currency, and most of them are short-term holders of Bitcoin. One is new money, based on Bitcoin, mostly long-term holders of Bitcoin.
Laoqian uses fiat currency as the bottom of the liquidity pyramid, follows the traditional liquidity pyramid model, and positions Bitcoin as a risky asset at the same level as stocks and bonds in the liquidity pyramid. It should be noted here that when gold is forced to After the demonetization attribute, its position at the bottom of the pyramid has died in name only, and fiat currency has become the de facto bottom of the liquidity pyramid.
The new money uses Bitcoin as the bottom layer of liquidity and follows the liquidity pyramid model of the underlying narrative and value proposition of Bitcoin. In fact, Bitcoin has always been the bottom layer of the liquidity pyramid in encrypted finance (excluding USDC and USDT, because in essence These two are not native assets of the crypto space).
Before the emergence of fiat-backed stablecoins, the liquidity trading pair of the cryptocurrency (Altcoin) market was Bitcoin, so in terms of liquidity migration in the encrypted financial space, Bitcoin is the only final liquidity bottom layer. .
Returning to the liquidity pyramid of traditional finance, the positioning of Bitcoin is also differentiated. Those old money that positions Bitcoin as a risk asset at the same level as bonds and stocks are gradually being released and reduced in the process of liquidity migration. , its proportion among Bitcoin holders is getting lower and lower, until its liquidity is exhausted to the point where it has no significant impact on the price of Bitcoin’s fiat currency, that is, when the correlation between the two returns to the long-term average, it is also is to return to irrelevance.
Once this irrelevant state returns, even if the liquidity crisis in traditional finance continues, or even becomes severe enough to break out, the liquidity migration of old money will no longer have a significant impact on Bitcoin.
This can also be seen from the on-chain data of Bitcoin. Judging from the current long-term Bitcoin holdings, the proportion of BTC held for more than one year continues to refresh the highest value in history, and currently exceeds 65.5%.
Although these gradually transformed long-term holders are not necessarily all new money with Bitcoin as the bottom of the liquidity pyramid, it is foreseeable that the liquidity exhaustion of old money is significant. The hand rate, the Bitcoin held by the old money will be further transferred to the new money, which also proves that every bear market decline of the asset will help him find the real owner.
Further reading:Delta Fund: Bitcoin may fall to 14,000 magnesium, and the bear market will last for a year and a half; Zhao Changpeng recommends diversifying investment and not all in
The owner of Bitcoin is a strong holder who uses Bitcoin as the asset at the bottom of the liquidity pyramid.
Going back to the liquidity pyramid model, as a risk layering model of financial assets, assets increase their liquidity through top-to-bottom layers of security, and their core appeal to the underlying assets is absolute security. The safest asset, in the future, it is entirely possible to jump from the risk asset layer to the bottom liquidity layer, and the bottom layer of the liquidity pyramid can only support the entire financial system stably with the support of absolutely safe assets. This kind of top-heavy The Inverted Pyramid Mobility Construct.
After gold is forcibly de-currency, the construction model of using fiat currency as a soft currency as the bottom of the liquidity pyramid will undoubtedly face the risk of extreme collapse.
Assets at the bottom of the liquidity pyramid have two core security requirements: one is no credit risk (not relying on counterparties), and the other is no devaluation risk (preserving wealth).
The current fiat currency simply cannot meet either of these two conditions. Fiat currency is a credit currency and is issued based on the balance sheet of the central bank.
If your wealth is a liability on someone else’s balance sheet, you can only pray that the entity that issued the debt will not go bankrupt or freeze your assets in one direction, but from the perspective of this Russia-Ukraine conflict, this risk is inevitable Yes, even credit assets held at the sovereign state level can be frozen by the issuer due to geopolitical issues.
Further reading:Situation Analysis | 7 Potential Effects of the Russian-Ukrainian War on Cryptocurrencies: Danger, Hope and Countermeasures
On the other hand, the central bank’s public goal is inflation, and the original meaning of inflation is the increase in currency, because currency is currency, not the rise in commodity prices. The naming method is really suspicious.
The result of inflation is currency devaluation. Let us use the original meaning of inflation, that is, the degree of additional currency issuance, to look at the risk of devaluation of fiat currency. Even in terms of the dollar, the hardest fiat currency asset in the world today, its broad currency has recently 30%. The average annual growth rate has also reached the interval of 6%-7%.
This figure may not be obvious. Let us calculate from the perspective of compound interest. This average annual growth rate means that the currency you hold will depreciate by half every 10-12 years, and the savings will last as long as a person’s lifetime. Calculated over 50 years, your savings will depreciate by 97% over your lifetime.
Of course, you can argue that you will not hold cash, you will choose to put cash into money market funds, bonds or stocks, but this is investment, not savings. The essence of investment is that you have to take greater risks, and the return of investment is From the risk premium, even if you beat inflation by investing, you are taking on additional risk that you would not have had when you could have saved money.
This is the embarrassment of the store of value in contemporary society. Due to the lack of a stable store of value brought by a savable currency that can resist inflation, people can only take additional unnecessary risks by saving financial investments in disguise.
In fact, the narrative and appeal of Bitcoin as the underlying asset of the liquidity pyramid will be further strengthened in the future due to the increase in uncertainty in the external world. In fact, in some countries where fiat currency collapses due to high inflation, such as Venezuela, etc. .
Bitcoin has become the de facto asset at the bottom of the liquidity pyramid. Ordinary people can only choose to land on Bitcoin as a lifeboat for wealth storage. In addition, with the increasingly strict control of cross-border capital flows in today’s world, the taxation and inflation of sovereign countries have intensified. The outbreak of geopolitical threats has provided a strong driving force for Bitcoin to enter the bottom assets of the liquidity pyramid.
The future can be expected, and Bitcoin will live up to its holder.
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