Author: @Web3_Mario
Abstract: In recent days, the crypto market has experienced a significant correction, and the market is in a state of confusion, coupled with the continuous accumulation of negative news from the crypto industry due to massive hacker attacks, making it difficult to understand the recent market trends in the short term. The author has some views on this and hopes to share and discuss them with you. I believe that there are two main reasons for the current crypto market correction: Firstly, from a micro perspective, the consecutive hacker attack incidents have caused concerns among traditional investors, leading to increased risk-averse sentiment. Secondly, from a macro perspective, the DeepSeek open-source week further burst the US AI bubble, coupled with the actual policy direction of the Trump administration, which on the one hand triggered market concerns about US stagflation, and on the other hand initiated a reassessment of Chinese risk assets.
Micro Level: Consecutive Massive Capital Losses Have Caused Concerns Among Traditional Investors About the Short-Term Trend of Crypto, Increasing Risk-Averse Sentiment
I believe everyone still vividly remembers the recent hacking incidents at Bybit and Infini, and there has been a lot of discussion about them, so I won't go into details here. Let's briefly discuss the impact of the stolen funds on these two companies and the industry. For Bybit, the $1.5 billion amount, although roughly equivalent to its annual net profit, is not a small sum for a company in the expansion stage. Typically, enterprises maintain a cash reserve of 3 months to 1 year, and considering the high cash flow nature of the exchange business, its cash reserve is likely closer to the lower end. Based on Coinbase's 2024 financial report, we can make some preliminary judgments. In 2024, Coinbase's annual revenue will more than double year-over-year to $6.564 billion, with a net profit of $2.6 billion, while total operating expenses will be $4.3 billion.
Referring to Coinbase's data and considering Bybit's current expansion stage with more aggressive cost control, it is estimated that Bybit's cash flow reserve is generally around $700 million to $1 billion. The $1.5 billion user fund loss is obviously beyond its self-owned funds, so it will need to resort to methods such as borrowing, equity financing, or shareholder capital injection to overcome this crisis. However, considering the concerns about the weak growth of the crypto market in 2025, the resulting cost of capital will likely be high, which will also bring certain burdens to the company's future expansion.
Of course, according to the latest news, the core vulnerability was in Safe rather than Bybit itself, so there may be some incentive to recover some of the losses. But an important factor plaguing the crypto industry is the imperfect legal framework, so the related litigation process will definitely be lengthy and costly. It may not be easy to recover the losses. As for Infini, the $50 million loss is obviously unbearable for a startup, but it seems that the founders have strong financial strength and can overcome the difficulties through capital injection.
These two consecutive major losses may not be surprising to crypto traders who are already accustomed to high-risk environments, but they have clearly shaken the trust of traditional investors. This can be seen from the capital outflow situation of the BTC ETF since the 21st attack, which represents a negative impact on traditional investors. If the concerns focus on whether it will hinder the development of a regulatory-friendly legal framework, then the matter is of great importance. Therefore, it can be said that the theft incidents are the trigger for this round of market correction at the micro level.
Macro Level: Intensified Geopolitical Competition Between Major Countries, DeepSeek Open-Source Week Reshaping the Competitive Landscape of the AI Sector, and the Resonance of Capital Migration During the Reassessment of Chinese Risk Assets
Now let's look at the macro-level influences, which are clearly unfavorable to the crypto market in the short term. After a period of observation, the policy direction of the Trump administration has become relatively clear, that is, through strategic contraction, using space to exchange time, to complete internal integration and industrial restructuring, so that the United States can gain the ability to re-industrialize, because technology and production capacity are the core factors in the competition between major countries. The most crucial factor to achieve this goal is "money", which is mainly reflected in the US fiscal situation, financing capabilities, and the real purchasing power of the US dollar, and the relationship between these three aspects is mutually reinforcing. Therefore, observing the changes in these related processes is not that easy, but by unraveling the clues, we can still find some core concerns:
1. The US fiscal deficit problem;
2. The risk of US stagflation;
3. The trend of the US dollar.
First, let's look at the first point, the US fiscal deficit problem. This problem has been analyzed in previous articles. In simple terms, the core reason for the current round of US fiscal deficit is to be traced back to the Biden administration's extraordinary economic stimulus measures to address the COVID-19 pandemic, as well as the Treasury Department represented by Yellen adjusting the US debt structure by over-issuing short-term debt, thereby collecting wealth globally through an inverted yield curve. The specific reason is that the over-issuance of short-term debt will suppress the price of short-term US Treasuries on the supply side, thereby increasing the yield of short-term US Treasuries, and the increase in short-term US Treasury yields will naturally attract the flow of the US dollar back to the US, as it can enjoy excess risk-free profits without losing time value. This is a very strong temptation, which is why representatives of capital such as Buffett chose to sell a large amount of risky assets and increase cash reserves in the previous cycle. In the short term, this has put tremendous pressure on the exchange rates of other sovereign countries. To avoid excessive currency depreciation, central banks of other countries have to sell short-term debt at a discount, turning paper losses into real losses, in order to stabilize exchange rates by obtaining US dollar liquidity. In general, this is a global wealth extraction strategy, especially targeting some emerging countries and trade surplus countries. However, this approach also has a problem, that is, the US debt structure will cause its short-term debt repayment pressure to increase sharply, as the principal and interest of short-term debt need to be repaid upon maturity. This is the origin of the debt crisis caused by the current US fiscal deficit, and it can also be said to be a time bomb left by the Democratic Party for Trump.
The biggest impact of the debt crisis is on US creditworthiness, which will reduce its financing capabilities. In other words, the US government needs to pay a higher interest rate to finance through government bonds, which will raise the overall neutral interest rate of US society, and this neutral interest rate cannot be influenced by the Federal Reserve's monetary policy. The raised neutral interest rate will put tremendous pressure on corporate operations, and the stagnation of economic growth will be transmitted to the general public through the job market, thereby triggering a negative feedback loop of investment and consumption contraction, leading to an economic recession.
Here is the English translation of the text, with the specified terms translated as requested:The focus of observing this main line is on how the Trump administration will reshape the fiscal discipline of the U.S. government and solve the fiscal deficit problem. The specific policies involved are the efficiency department led by Musk, the reduction in U.S. government spending and the process of redundancy layoffs, as well as the impact on the economy during the process. Currently, the force of Trump's latest internal integration is very strong, and the reform has entered deep waters. I will not go into tracking the progress here, but only introduce some of my own observations.
1. Pay attention to the radical degree of the efficiency department's policy promotion, such as layoffs and reductions that are too drastic, which will inevitably cause concerns about the economic outlook in the short term, which is usually unfavorable to risk assets.
2. Pay attention to the feedback of macroeconomic indicators on its policies, such as employment data and GDP data.
3. Pay attention to the progress of tax cut policies.
We cannot underestimate the impact of government spending and government employees on the U.S. economy. Normally, we would think that the proportion of government spending in China is definitely higher than in the U.S., but this is actually a misconception. The U.S. government spending accounts for 17.2% of GDP, while China is 16.51%, and government spending is usually transmitted to the entire economic system through the industrial chain multiplier. The structural differences between the two are mainly reflected in the fact that consumption accounts for a very high proportion of the U.S. GPD, while imports and exports account for a higher proportion of China's GDP composition. This represents two different ways of boosting the economy. For the U.S., expanding external demand and increasing exports is a means of boosting the economy, while for China, domestic demand still has great potential to be tapped.
It's the same with consumption. In this chart, we can see that the wage level of the government sector is not low in the entire industrial chain, and the reduction of government redundancy has also hit the economic growth of the U.S. on the consumption side. Therefore, the overly aggressive policy promotion will certainly trigger the panic of economic recession. Some things, if slowed down, will be better, but they also need to be coordinated with the rhythm of the Trump administration's overall policy promotion. As for the promotion of tax cut policies, it seems that Trump's focus is not on this for the time being, so the concerns about the short-term reduction in revenue are not yet obvious, but we still need to remain vigilant.
Secondly, there is the concern about the problem of stagflation in the U.S. Stagflation refers to the situation where economic growth stagnates while inflation accelerates, which is unacceptable on the misery index. In addition to the impact of government spending cuts on economic growth mentioned earlier, there are some other important points of attention:
1. How will DeepSeek further disrupt the AI track.
2. The progress of the U.S. sovereign wealth fund.
3. The impact of tariff policies and geopolitical conflicts on inflation.
Among them, the author believes that the first point is the most significant in the short term. Those interested in technology may know that the open source week of DeepSeek has produced extremely shocking results, all of which point to one thing: the greatly reduced demand for computing power in AI. This is the reason why the stock market could remain stable during the U.S. past rate hike cycle, which is due to the huge narrative of the AI track and the monopoly of the U.S. over the upstream and downstream of the AI track. The market has given extremely high valuations to the U.S. AI sector-related stocks, naturally with an optimistic attitude towards the new round of economic growth driven by AI in the U.S. However, all this will be reversed by DeepSeek, and the biggest impact of DeepSeek is in two aspects. One is on the cost side, that is, it has greatly reduced the demand for computing power, which has led to a significant reduction in the growth potential of the upstream computing power providers represented by Nvidia. The other is that through open source means, it has broken the monopoly of the U.S. over the downstream algorithms of AI, thereby depressing the valuations of the algorithm providers represented by OpenAI. And this impact has just begun, and we need to see how the U.S. AI industry will respond, but in the short term, the decline in the valuations of U.S. AI stocks and the return of Chinese tech stock valuations have already become apparent.
In fact, for a long time, the U.S. has suppressed the valuations of Chinese companies through public opinion pressure, which has actually kept them in an undervalued state. Benefiting from the grand narrative brought by DeepSeek's upgrade of China's manufacturing industry, as well as the relatively mild attitude of Trump's policies on China-related issues, which has reduced geopolitical risks, the valuations of Chinese and U.S. companies have returned to normal. According to a report from CICC, the recent surge in the Hong Kong stock market is mainly due to the influx of southbound capital, that is, capital from the mainland, as well as the influx of passive overseas capital, while active overseas funds, subject to Trump's investment restrictions on Chinese companies, have not shown significant changes. However, changes in liquidity are also very important to observe, as there are many ways to bypass direct investment and enjoy the dividends of the rebound in Chinese company valuations, such as investing in related markets like Singapore. Changes in capital flows can be easily identified from the Hong Kong dollar exchange rate, as we know that the Hong Kong dollar is pegged to the U.S. dollar, so when the Hong Kong dollar approaches 7.75, it indicates a stronger investment appetite of foreign capital for Hong Kong stocks.
The second point worth noting is the construction of the U.S. sovereign wealth fund. We know that sovereign wealth funds are a good supplement to the government's financial resources for any sovereign country, especially those with large trade surpluses in U.S. dollars. In the ranking of the world's top ten sovereign wealth funds, China has 3, the Middle East has 4, and Singapore has 2, while the top-ranked is the Norwegian Government Pension Fund Global, with total assets of about $1.55 trillion. Due to the constitutional framework of the U.S. federal government, the establishment of a sovereign wealth fund in the U.S. is actually quite difficult, as the federal government can only receive direct taxes, and its financial resources are relatively limited. However, Trump seems to have instructed the Treasury Department to establish a trillion-dollar sovereign wealth fund, which is naturally also a means of easing the fiscal deficit, but the problem here is where the money will come from and what it will be invested in.
Here is the English translation of the text, with the specified terms retained and not translated:According to the remarks of the new US Treasury Secretary Yellen, it seems that the intention is to reprice the US gold reserves, in order to provide $750 billion in liquidity for the sovereign wealth fund. The reason behind this is that according to Section 5117 of Title 31 of the US Code, the statutory value of the US government's 8,133 metric tons of gold is still $42.22 per ounce, but if calculated at the current market price of $2,920 per ounce, the US government would have $750 billion in unrealized returns. So by amending the law, additional liquidity can be obtained, which can be considered a clever move. However, if approved, the dollars used for investment or debt relief will be obtained by selling gold, which will inevitably have an impact on the gold price trend.
As for what to invest in, the author believes that it is most likely to revolve around the goal of reshoring production to the US, and therefore the impact on coin is probably limited. In previous articles, the author has analyzed that in the short to medium term, coin has become a hedge against the US economy, based on the premise that the US has sufficient pricing power over this asset. However, in the short term, the economy has not shown a clear recession, so this is not the main focus of the Trump policy, but rather an important tool to get through the reform pains.
Finally, on the issue of tariffs, the tariff concerns have actually been well traded. Currently, it appears that the tariff policy is more of a bargaining chip for Trump's negotiations, rather than a necessary choice, as can be seen from the moderate level of tariffs on China. The author is more interested in the next step, which is the tariffs on Europe, and what the US can get in return. Of course, the author is concerned about the process of Europe regaining its independence, as harvesting Europe to restore its own strength is the first step for the US to participate in this great power game. As for the inflation risk, although the CPI has been growing for several consecutive months, considering that the overall level is still under control, and the moderation of Trump's tariff policy, the current risk does not seem to be too large.
Finally, let's talk about the trend of the US dollar, which is a very critical issue that needs to be closely monitored. In fact, the debate over the strength or weakness of the US dollar under Trump's new term is ongoing, and the remarks of some key figures have had a significant impact on the market. For example, Stephen Mnuchin, the newly appointed economic advisor and chief economic strategist of the White House, stated that the US needs a weak US dollar to boost exports and promote domestic reindustrialization. After causing market panic, US Treasury Secretary Yellen tried to reassure the market on February 7, stating that the US will continue its "strong US dollar" policy, but that the renminbi is a bit too undervalued.
In fact, this is an interesting issue. Let's look at the impact of a strong or weak US dollar on the US. First, a strong US dollar will have two main effects. Firstly, on asset prices. As the US dollar appreciates, dollar-denominated assets will perform better, which is mainly beneficial to US Treasuries and the US stocks of global companies, as it increases the enthusiasm for the market to buy US Treasuries. Secondly, in the industrial sector, a stronger purchasing power of the US dollar benefits global US companies in terms of cost reduction, but suppresses the competitiveness of domestic industrial products in the international market, which is not conducive to domestic industrialization. The impact of a weak US dollar is the opposite. Considering Trump's overall policy design, which is based on reshoring industries, increasing production capacity, and enhancing the competitiveness of the great power game, a weak US dollar policy seems to be the right solution. However, there is a problem here - a weak US dollar will lead to a devaluation of dollar-denominated assets, and given the current fragility of the US economy and financing pressure, an overly rapid weak US dollar policy could prevent the US from weathering the pains of reform.
There is a representative event that illustrates this pressure. In Buffett's annual shareholder letter on February 25, he explicitly expressed his dissatisfaction with the US fiscal deficit problem, which has obviously exacerbated market concerns. We know that Buffett's leverage strategy in the recent period has been to clear out overvalued US risk assets and allocate more cash reserves to US short-term Treasuries, while also allocating to some of Japan's major trading companies, which is obviously a means of interest rate arbitrage, and I don't need to go into it in detail here. What I want to say is that Buffett's views have a strong influence in the market, and capital that is overweight in the US dollar will naturally have a unified concern, which is the real purchasing power of the US dollar, that is, the concern about the depreciation of the US dollar. So the pressure to enter the depreciation channel too quickly is very large.
However, regardless, using space to exchange time, and gradually reducing debt, will become the choice of both China and the US, and the trend of the US dollar is most likely to follow a pattern of first strengthening and then weakening. The changes in dollar-denominated assets will also fluctuate with this cycle. assets are also one of the assets affected by this wave.
Finally, I would like to share my thoughts on the market. I believe that there are too many uncertain factors in the current market, so individual investors can choose a barbell strategy to enhance the anti-fragility of their investment portfolio. On the one hand, allocate to blue-chip or participate in some low-risk yields, and on the other hand, allocate a small position to some high-volatility targets when the market is low. As for the short-term market trend, the accumulation of many adverse factors has indeed led to certain price pressure, but there does not seem to be a clear structural risk, so if the market experiences an excessive correction due to panic, appropriate positioning may also be a choice.
