Coinbase: Cryptocurrencies to Drive Alternative Financial Narratives, Traditional Economic Theories to Face Significant Challenges

The main reason for the decline in Bitcoin prices is deleveraging, recent events in the cryptocurrency industry will ultimately drive the narrative for alternative assets and the entire alternative financial system.

Author: Max Bronstein, Institutional Crypto Research at Coinbase
Translation by: Jiangfei Lu

In the first quarter of 2020, concerns about buybacks, low liquidity, and excessive leverage gradually surfaced, making this quarter one for the financial history books.

Bitcoin, of course, was not immune, experiencing a decline of 11.67% during the same period. Despite high market fears, reports of Bitcoin's demise were greatly exaggerated.

From a market structure perspective, the main reason for the recent Bitcoin price drop over the past few weeks has been deleveraging, while also hedging against first-quarter price risk. The events that occurred on March 13 on the Bitcoin derivatives exchange BitMEX were actually quite similar to the "Black Monday" of 1987.

Firstly, as shown in the chart below, historical data indicates that the second quarter of each year is usually the strongest quarter for Bitcoin performance. In the past five years, Bitcoin prices have risen in four second quarters, with significant gains. Similarly, two out of the top three best-performing quarters for Bitcoin were in the "second quarter."

Secondly, Bitcoin's hash rate has been rapidly declining. The last mining difficulty adjustment saw a decrease of 15.95%, the second-largest drop in Bitcoin difficulty adjustment history. The next mining difficulty adjustment is expected to decrease by another 12.78%, making it the fifth-largest drop in Bitcoin difficulty adjustment history. The decline in hash rate is a sign of Bitcoin deleveraging.

In this scenario, we can actually conceptualize Bitcoin mining as a financial derivative, where mining is seen as a form of physical delivery Bitcoin futures contract. Miners act as investors who allocate funds to acquire Bitcoin, not directly in the spot market, but by mining Bitcoin through equipment and electricity purchase, essentially buying Bitcoin at a "discounted price" in the spot market.

As TradeBlock points out, post-halving, the average cost of breakeven for Bitcoin is around $10,000-15,000. If this is the case, when Bitcoin prices fall below the breakeven cost post-halving, mining becomes akin to being in a "contango" state, meaning that buying Bitcoin directly in the spot market is more attractive than mining for it.

As mining production efficiency continues to solidify and more people look to the Bitcoin spot market as their source of acquisition, the long-term reset of the mining industry is healthy.

Regarding stablecoin issuance, after March 12, the stablecoin market quickly expanded, indicating that a lot of "dry powder" is concentrated in wallets and exchanges. With decreasing stablecoin yields, trading may become its primary use case. Last week, USDT market capitalization increased by $1 billion.

Next, let's examine Bitcoin holder behavior. According to Coin Metrics, recent Bitcoin market sell-offs have been primarily concentrated in accounts holding Bitcoin for around 30 days or in newer Unspent Transaction Outputs (UTXO). On the other hand, UTXOs unspent for a year or more are mostly dormant.

Similarly, market participants' reaction to the Bitcoin crash on March 12 was "severely overbought," as the volatility throughout the entire process was the same for new users. As shown in a recent analysis report released this week, Coinbase indicated that retail buyers typically purchase 60% more Bitcoin than they sell, but during the market crash, this figure increased to 67%. Bitcoin is the most popular cryptocurrency among Coinbase buyers, with deposit and trading volume exceeding half of the exchange's total deposit and trading volume, followed by Ethereum (ETH) and Ripple (XRP).

Finally, in terms of market structure, the futures curve has been consistently in a state of backwardation, as market participants seek hedging, which will also drive demand for Bitcoin lending. These borrowers must repurchase principal + interest, so they are very sensitive to any price changes in the market.

Bulls are gaining momentum, and the market is starting to recover. Just last week, the BitMEX perpetual swap contract saw a 30% drop.

On a macro level, I would like to caution everyone that the recent events in the crypto industry may not immediately impact the second quarter. However, these events will ultimately drive the narrative of alternative assets and the entire alternative financial system.

• The People's Bank of China - Rate Cuts
• Bank of Canada - Interest Rate Reduction
• Reserve Bank of Australia - Lowering Rates and Starting Bond Purchases
• European Central Bank lowered rates to zero and restarted $750 billion bond purchases

Regardless of whether these policies are necessary, central banks' actions are sending a signal to citizens that currency is their political tool, not a source of wealth. Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, claimed "cash is unlimited," while Christine Lagarde, the new President of the European Central Bank, also tweeted a similar sentiment at 1:30 AM.

Undoubtedly, central bank actions will lead to rapid devaluation of currency, and compared to taxpayers, businesses can actually benefit more. The dollar is more like a currency for bailing out businesses, so it is logical to "exit" the dollar. Bitcoin has a most direct use case, which is to hedge against inflation. Despite the current high unemployment rate, governments around the world are taking similar actions, increasing the money supply to subsidize workers (demand-side) to prevent a rapid economic downturn.

Meanwhile, supply chains are becoming more diversified and less globalized, a trend that will raise labor costs. During economic downturns, workers stay at home, so Gross Domestic Product (supply) is expected to see a significant decline.

If central banks worldwide can maintain stable asset prices, the balance sheets of the world will expand to record levels. Moreover, if we can restore the economy to normal within the next six months, there will be a large amount of cash in the market, making commodities scarce.

All these factors together are actually a huge test of the value proposition of Bitcoin. Debt-based currency systems are facing a crisis, and the demand for decentralized alternative solutions has never been stronger in the market.

We believe that traditional economic theories may face significant challenges in the coming years, and compared to other industries, cryptocurrencies are better positioned to drive this change.

One point to note is that the content mentioned in this article is not financial advice, and please do not interpret it in that direction. Everything expressed here is personal opinion.

Let's keep moving forward!

This article is authorized for republication by ChainNews, Source: ChainNews (ID: chainnewscom)

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