In the past month, exciting developments have also occurred in the field of decentralized finance (DeFi). We will discuss DeFi and summarize the changes in other cryptocurrency markets in the second half of the article as usual.
Cryptocurrency in the post-Jackson Hall era
The Jackson Hole Global Central Bank Annual Conference originated in 1982. Volcker, then chairman of the Federal Reserve, attended the economic policy seminar held in Jackson Hole that year and said at the meeting that it is necessary to stabilize prices and reduce inflation. Take steps to restore economic growth and reduce unemployment.
Fundamental changes in how the Fed conducts monetary policy are extremely rare. Although economic historians debated the details, many pointed out that the Fed’s policy approach has undergone two major changes in the past 50 years:
- In 1977, the Federal Reserve Reform Act officially introduced banks’ dual goals of low inflation and maximizing employment;
- In 2008, the Federal Reserve began to implement quantitative easing policies to monitor the unprecedented growth in the size and types of assets held on its balance sheet.
These two transitions marked the beginning of the opportunity to determine a generation:
- The 1977 Act created the conditions for Fed Chairman Paul Volcker to “break the shadow of inflation” from 1979 to 1981, raising interest rates to 19%. In turn, in the following 40 years, as interest rates rose from these highs The decline in the market has triggered a 40-year bull market; • The policy change in 2008 gave back to the favor of stock investors. Through near-zero interest rates and the purchase of diversified assets, the market was flooded with liquidity, which caused widespread inflation of many assets and gave birth to The longest bull market in history.
- On August 27, 2020, Fed Chairman Powell delivered a landmark speech at the Jackson Hole Economic Policy Symposium, announcing what some consider to be the third major change in Fed policy.
Although more subtle than those in 1977 and 2008, the 2020 transition is likely to have the same effect. This is worthy of further study.
What is the new policy framework and why is it important?
The core of the new policy framework is a significantly more relaxed and flexible way of managing inflation. This change is packaged as a small semantic change, but it has a big impact.
Prior to Powell’s speech, the Fed’s policy goal was to maintain an annual inflation rate of 2%. Now, the Fed’s goal will be to achieve an average inflation rate of 2% over a period of time, with the flexibility to be above or below 2% in any given year.
This sounds like a mild change, but in the world of Fed policy, it is huge. This means that if the inflation rate runs below 2% for several years, the Fed will let it run at a higher level for a period of time. There is no clear formula for how to calculate the average inflation rate. This gives the Fed new flexibility to adjust the inflation results based on feelings, which can achieve both the inflation target and the macroeconomic target.
What does this mean for investors?
One of the best investment advice is Marty Zweig’s old saying: “Don’t fight the Fed.” In this case, if the Fed is willing to see inflation rise higher at all costs, it can be fair to assume that it will eventually do whatever it wants… and it may be higher than it claims. When reflecting on the new policy, the legendary investor Stanley Druckenmiller predicted that in the next four to five years, we can easily see that the inflation rate is between 5% and 10%. Others-including former Fed Chairman Alan Greenspan and Ray Dalio-are also concerned about inflation.
At Bitwise, we hear directly about inflation concerns in our conversations with customers every day.
As investors increasingly worry about the Fed’s tolerance for high inflation, we believe that one of the winners, and possibly even the biggest winner, will be Bitcoin.
Why is Bitcoin, not gold?
When investors are worried about inflation and want to adjust accordingly, the traditional safe haven is of course gold. In fact, since the beginning of this year, investors have allocated more than US$29 billion in gold ETFs alone.
However, when relying solely on gold to hedge a portfolio, there is a practical challenge: in order for gold to have a meaningful impact on overall performance-to truly protect you in the worst case, you must allocate a lot of gold, so you must Withdraw from most other assets.
The prospect of doing so makes many people feel uneasy. Before making such a big change, there are many factors that need to be considered: inflation is a problem, yes, but it is not guaranteed; gold is not an income-generating asset; stocks may have more room for performance; and, as gold approaches historical highs , Some people worry that it doesn’t have much room to rise (maybe even decline in the future).
It is from this perspective that many people regard Bitcoin as a godsend.
Like gold, Bitcoin has low correlation with other asset classes and is highly liquid. However, the important difference with gold is hidden. Bitcoin is more volatile and unacceptable. Its market value is only 2% of today’s gold.
If an investor wants to put all their money in one asset, these features may not sound attractive. But in situations where investors are trying to hedge their portfolios, these features mean you can get a lot of returns.
This year, in the incredibly turbulent and uncertain market, as of September 15, GLD has risen by about 29% and BTC has risen by about 48%. Of course, this is only a year, but as many reports show, the performance over the years is also impressive.
Bitcoin was not recognized by everyone at the beginning, and it also carries many risks. But this also means that Bitcoin still has a lot of room to operate, which also makes its potential very large. Of course, more and more people believe that the digital version of gold-with its anti-confiscation, easy transfer, easy storage, always open market and privacy-is an important part of the future.
Jerome Powell’s landmark new inflation policy has caused many investors to consider how to allocate assets when inflation arrives. When we look at the options available to hedge against this risk, Bitcoin is performing better.
As Paul Tudor Jones recently wrote about his fund’s allocation of Bitcoin: “I am not a hard currencyist, nor a cryptocurrency fanatic. I am not a millennial… but a baby boomer, I I want to seize the opportunity while protecting my assets in a constantly changing environment.”
Now, it seems more and more is the right place and the right time for Bitcoin.
Fund and index rebalancing in August 2020
Bitwise’s research and portfolio management team continuously monitors the cryptocurrency ecosystem to ensure that the Bitwise Index and Bitwise Fund capture all opportunities available to investors in each market while minimizing uncompensated risks.
As part of this process, we updated the analysis of the issuance volume of each cryptocurrency asset in the five-year plan; re-evaluated the eligibility of all major currencies based on transaction volume and potential risks; and recalculated the market value ranking through the program to ensure that we capture To the most valuable item on the market. We also regularly review our index method to ensure that it reflects the current institution’s performance in the cryptocurrency investment market.
The results of the rebalancing in August 2020 are as follows:
- The composition of Bitwise 10 Large Cap Crypto Index has not changed. Therefore, the volume of the index in August was the smallest. • The Bitwise Bitcoin Fund will only rebalance in the event of a major hard fork of the Bitcoin blockchain. Since no such incident occurred in August 2020, no rebalancing occurred and the turnover was 0%. • The Bitwise Ethereum Fund only rebalances in the event of a major hard fork of the Ethereum blockchain. Since no such incident occurred in August 2020, no rebalancing occurred and the turnover was 0%.
Cryptocurrency asset prices in August
Bitwise 10 Large Cap Crypto Index (BITX) achieved another good performance this month, rising 7.6%. 8 out of 10 currencies have received positive returns. From the beginning of the year to August 31, the index rose by 79.6%.
The best-performing currency in August was Chainlink (LINK), with a staggering 112.3% increase for the third consecutive month. As highlighted in the investor letter in July, LINK is one of the main beneficiaries of the DeFi trend, which is sweeping the cryptocurrency industry. The development of this asset was also driven by Chainlink’s acquisition of DECO technology, which came from Cornell University. The creator of DECO is a well-respected computer scientist who shaped some key concepts used in the cryptocurrency industry and joined Chainlink as the chief scientist.
Ethereum (ETH), the second-best performer in the index, rose 27.1%. Ether is the second largest currency of Bitwise 10 and the backbone of the DeFi economy.
On the other hand, Cardano (ADA) and Bitcoin Cash (BCH) have negative earnings this month, falling 9.8% and 7.8%, respectively. ADA appears to be slowing down after a very strong year-to-date performance; even after its poor performance in August, it is the second-best performing currency in the Bitwise 10 index year-to-date. BCH is one of the worst performing assets in the index this year.
The dispersion between the best and worst performing Bitwise 10 currencies expanded to 122.0 percentage points in August. This is the largest dispersion in the past 12 months, with an average of 56.4 percentage points during the period and a low of 23.0 percentage points in March 2020.
See for details
Major developments in August
As always, there have been many exciting products in the cryptocurrency industry in the past month, including the DeFi market that continues to experience record growth.
- The adoption rate of stablecoins continues to rise. The circulation of the two major stablecoins (Tether and USDC) broke through the 15 billion U.S. dollar mark in August and approached the 18 billion U.S. dollar mark in September. This market is now more than three times larger than it was at the beginning of 2020, and this trend shows no signs of abating. Most stablecoins (64%) are issued on the Ethereum blockchain, which means that Ethereum continues to be the platform of choice.
- DeFi smart contracts continue to attract capital and develop new use cases. The significant growth in the DeFi field discussed in the July investor letter continued to develop rapidly in August. At the time of writing this letter, according to DeFi Pulse data, there are now 8 DeFi applications that have locked up more than $500 million in assets, and 4 applications have locked up more than $1 billion.
An important driving force for demand in this field is “liquidity gains”. This process is to lock the investment of encrypted assets in the DeFI agreement as a way to earn interest (similar to depositing money in a bank to earn interest). In the past few months, liquidity gains have attracted multiple billion-dollar assets.
Based on this trend, a new technology called Yearn.Finance achieved a market value of approximately US$1 billion in August, which is only one and a half months after its token launch. Yearn is an application that allows its users to deposit digital assets (including ETH) and allocate assets on the lucrative DeFi lending platform. One aspect that makes investors excited about Year is that its creators chose a more decentralized startup process than other DeFi assets.
- Uniswap’s trading volume ranks first among Coinbase. In the past few months, another interesting aspect is that the most used applications have expanded from decentralized lending to other decentralized services, such as exchanges and asset issuance. An incredible result is that the decentralized exchange and automated market maker Uniswap’s recent daily trading volume exceeded $1 billion, which is more than 10 times more than last month, and is more than the largest cryptocurrency exchange in the United States, Coinbase The transaction volume monitored by Pro is 50% higher, and Uniswap is currently the leader in the amount of locked assets in the DeFi field, reaching $1.8 billion.
- Ethereum transaction fees hit the highest level in history. Due to increased activity on the network leading to increased demand for processing power, transaction processing fees on the Ethereum network reached the highest level in history in August. Ethereum developers are upgrading to improve the processing power of the network, but this is a challenging problem (described in detail below). The figure below shows the fees paid in the Ethereum network (drawn on a logarithmic scale to make the highest point easier to identify).
In terms of store of value, the first listed company this month used Bitcoin for part of its cash reserves.
- MicroStrategy, a Nasdaq-listed business intelligence and software company worth 1.4 billion US dollars, uses Bitcoin as its main reserve asset: The company has purchased 21,454 Bitcoins (approximately US$250 million at current prices) and strives to make Its reserves are diversified.
Co-founder and CEO Michael Saylor believes that after considering potential investments in various asset classes, the company finally chose Bitcoin.
“We found that for those seeking long-term store of value, Bitcoin’s global acceptance, brand recognition, ecosystem vitality, network advantages, structural flexibility, technical utility, and community atmosphere make it a A superior asset class is very convincing. Bitcoin is digital gold-harder, stronger, faster, and smarter than any currency before it. We expect its value to increase with technological advances and wider adoption As well as the accumulation of network effects, network effects have contributed to the rise of many modern killer products.”
MicroStrategy does not stop there. On September 14, the company bought another $175 million worth of bitcoin, so the total amount of its purchases expanded to $425 million.
M&A activity in the cryptocurrency market remains lively, including transactions involving the largest financial institution in the United States.
- JPMorgan Chase sold its blockchain division to Ethereum infrastructure provider Consensys while making strategic investments. The two companies have been working together since 2016, when JP Morgan Chase launched Quorum, a blockchain based on Ethereum. As part of the transaction, JP Morgan will invest US$20 million in ConsenSys.
At the same time, the embrace of digital currencies by central banks is also continuing to advance.
- The Federal Reserve Bank of Boston and the Massachusetts Institute of Technology collaborated on the Central Bank Digital Currency (CBDC) research project. According to Lael Brainard, a member of the Federal Reserve Bank’s board of directors, the two institutions are collaborating to “build and test a digital currency for central bank use.” The bank is expected to announce the results of this cooperation and disclose its software code.
- China expands pilot cities for digital currencies. According to the Wall Street Journal, China is expanding its digital currency pilot program to several of the most economically prosperous areas, including Beijing. Some media reported that relevant policy design should be completed before the end of the year. The People’s Bank of China launched a digital currency trial earlier this year, including four major cities, as part of the preparations for the Beijing 2022 Winter Olympics.
