Author: fejau
Compiled by: Luffy, Foresight News
I want to write about something I have been repeatedly contemplating: how Bitcoin might perform when experiencing a significant capital flow pattern transformation unprecedented since its inception. I believe that once the deleveraging process concludes, Bitcoin will encounter an excellent trading opportunity. In this article, I will elaborate on my thoughts in detail. What are the key driving factors of Bitcoin's price? I will draw upon Michael Howell's research on the historical driving factors of Bitcoin's price trends, and then use these findings to further understand how intertwined factors might evolve in the near future. [Images omitted for brevity] Bitcoin's price is driven by these factors: - Overall investor preference for high-risk, high-beta assets - Bitcoin's correlation with gold - Global liquidity Since 2021, I understand the simple framework of risk appetite, gold performance, and global liquidity by using the fiscal deficit to GDP ratio as a quick observation indicator to gain insight into the fiscal stimulus factors that have dominated global markets since 2021. Mechanistically, a higher fiscal deficit to GDP ratio leads to increased inflation, rising nominal GDP, and consequently, corporate revenues will increase as income is a nominal indicator. For companies enjoying economies of scale, this is favorable for their profit growth. To a large extent, monetary policy has been secondary to fiscal stimulus, which is the primary driver of risk asset activity. As George Robertson's frequently updated chart shows, US monetary stimulus has been very weak compared to fiscal stimulus, so I will temporarily disregard monetary stimulus in this discussion. [Remaining text continues in the same manner, fully translated to English]- Capital will leave dollar-denominated assets and flow back to domestic markets. This means the U.S. stock market will underperform other regions of the world, bond yields will rise, and the dollar will depreciate.
- The countries to which these funds return will no longer be constrained by fiscal deficits, and other economies will begin to spend extensively and print money to fill their growing fiscal gaps.
- As the U.S. continues to shift from a global capital partner to a protectionist role, holders of dollar assets will have to increase risk premiums associated with these previously considered high-quality assets and must set wider safety margins. When this occurs, it will lead to rising bond yields, and foreign central banks will be interested in diversifying their balance sheets, no longer relying solely on U.S. Treasury bonds, but turning to other neutral assets like gold. Similarly, foreign sovereign wealth funds and pension funds may also make such portfolio diversification adjustments.
- Contrary to these views is the perspective that the U.S. is the center of innovation and technology-driven growth, and no country can replace this position. Europe's bureaucracy and socialist tendencies are too strong to develop capitalism like the U.S. I understand this view, and it may mean this won't be a trend lasting for years, but more likely a medium-term trend.
Returning to the title of this article, the first round of trading is selling overweighted global dollar assets and avoiding the ongoing deleveraging process. Since global allocation of these assets is severely overweight, the deleveraging process could become messy when large asset managers and more speculative participants like multi-strategy hedge funds with strict stop-loss settings reach their risk limits. When this happens, days similar to margin call notices will occur, with massive assets needing to be sold to raise cash. Currently, the key is to survive this process and maintain sufficient cash reserves.
However, as the deleveraging process stabilizes, the next round of trading begins. Diversifying portfolios to include foreign stocks, foreign bonds, gold, commodities, and even Bitcoin.
During market rotations and days without margin call notices, we have already begun to see this dynamic gradually forming. The Dollar Index (DXY) is falling, U.S. stocks are underperforming stocks in other regions of the world, gold prices are soaring, and Bitcoin is surprisingly resilient relative to traditional U.S. tech stocks.
I believe that as this occurs, the marginal growth of global liquidity will shift to a state completely opposite to what we have been accustomed to. Other regions of the world will take the lead in increasing global liquidity and risk appetite.
When I consider the risks of such diversification investments in the context of global trade wars, I worry that deep investment in other countries' risk assets might bring tail risks due to potential negative headlines about tariffs affecting these assets. Therefore, during this transition, gold and Bitcoin become my preferred choices for global diversification investments.
Gold is currently performing extremely strongly, setting new historical highs daily. However, although Bitcoin has surprisingly held up during this overall shift, its beta correlation with risk appetite has so far limited its gains, unable to match gold's excellent performance.
So, as we move towards global capital rebalancing, I believe the next trading opportunity after this round will be in Bitcoin.
When I compare this framework with Howell's correlation research, I find they are mutually compatible:
- The U.S. stock market will not be influenced by global liquidity, only by liquidity measured through fiscal stimulus and some capital inflows. However, Bitcoin is a global asset that reflects the broader state of global liquidity.
- As this view gradually gains recognition and risk allocators continue rebalancing, I believe risk appetite will be driven by regions other than the U.S.
- Gold's performance couldn't be better, and Bitcoin has partial correlation with gold, which aligns with our expectations.
Considering all these factors, for the first time in my life, I see the possibility of Bitcoin decoupling from U.S. tech stocks. I know this is a high-risk idea and often marks a local high point for Bitcoin prices. But different this time is that these capital flows might undergo significant and lasting changes.
So, for a risk-seeking macro trader like myself, Bitcoin feels like the most worthwhile trade after this round. You can't impose tariffs on Bitcoin, it doesn't care which country's borders it's within, it provides high-beta returns for portfolios, has no tail risks associated with U.S. tech stocks, I don't need to judge whether the EU can solve its own problems, and it provides exposure to global liquidity, not just U.S. liquidity.
This market landscape is precisely Bitcoin's opportunity. Once the dust of deleveraging settles, it will be the first to start and accelerate forward.
