Bitcoin after deleveraging, the next winner of global capital flows

ผู้เขียนต้นฉบับ: fejau

ต้นฉบับแปล: TechFlow

I wanted to write about a question I’ve been thinking about for a while: how Bitcoin might perform in the event of a major shift in capital flows, something that Bitcoin has never experienced since its inception.

I believe that once deleveraging is over, Bitcoin will present an incredible trading opportunity, and in this post I will detail my thinking.

What are the historical key drivers of Bitcoin price?

I will take Michael Howell’s work on the historical drivers of Bitcoin’s price and use it to further understand how these intersecting factors may evolve in the near future.

As shown in the above figure, the drivers of Bitcoin include:

• Investor demand for riskier, higher-beta assets

• Correlation with Gold

• Global liquidity

I use a simple framework to understand risk appetite, gold performance and global liquidity by focusing on fiscal เด็ดขาดcits as a percentage of GDP as an easy way to understand the fiscal stimulus that has dominated global markets since 2021.

A higher fiscal deficit as a percentage of GDP mechanically leads to higher inflation, higher nominal GDP, and therefore higher total revenue for businesses, since revenue is a nominal indicator. This is a boon to earnings growth for businesses that are able to enjoy economies of scale.

For the most part, monetary policy has played a minor role in risk asset activity, while fiscal stimulus has been the primary driver. As shown in this chart regularly updated by @BickerinBrattle , monetary stimulus in the US is so weak relative to fiscal stimulus that I’m leaving it aside for this discussion.

As the chart below shows, the United States has a much higher fiscal deficit as a percentage of GDP than any other major advanced Western economy.

Because the US runs such a large deficit, income growth has been dominant and has caused the US stock market to outperform other modern economies:

Because of this dynamic, the US stock market has become the main marginal driver of risk asset growth, wealth effects, global liquidity, and therefore the magnet for global capital: the US. Due to this dynamic of capital inflows into the US, coupled with a large trade deficit that results in the US exchanging goods for dollars acquired abroad, which are then reinvested in dollar-denominated assets (such as Treasuries and MAG 7), the US has become the main driver of global risk appetite.

Now, back to Michael Howell’s research above. Risk appetite and global liquidity have been driven primarily by the US over the past decade, a trend that has accelerated since the pandemic as the US has been running such a large fiscal deficit relative to other countries.

Thus, Bitcoin, despite being a globally liquid asset (not just in the U.S.), has had an increasingly positive correlation with the U.S. stock market since 2021.

Now, I believe that the correlation with the US stock market is spurious. When I use the term spurious correlation here, I am speaking from a statistical perspective, arguing that a third dependent variable that does not show up in the correlation analysis is the actual driving factor. I believe that factor is global liquidity, which, as we have described above, has been led by the US for nearly a decade.

As we move deeper into statistical significance, we also have to establish causality, not just positive correlation. Fortunately, Michael Howell has also done some excellent work in this regard, establishing a causal relationship between global liquidity and Bitcoin through Granger causality tests.

So, what kind of baseline starting point does this give us?

Bitcoin is primarily driven by global liquidity, and since the U.S. is the primary driver of increased global liquidity, a false correlation emerges.

Over the past month, as we speculate about Trump’s trade policy objectives and the restructuring of global capital and commodity flows, a few dominant narratives have emerged. I view them as:

• The Trump administration wants to reduce trade deficits with other countries, which mechanically means reducing the flow of dollars to foreign countries that will not be reinvested in U.S. assets. A reduction in the trade deficit cannot occur without this happening.

• The Trump administration believes that foreign currencies are artificially weak, and therefore the dollar is artificially strong, and wants to rebalance this. In short, a weaker dollar and stronger foreign currencies will lead to higher interest rates in other countries, prompting capital to flow back to capture these interest rates, which perform better in foreign exchange-adjusted terms, as well as domestic stocks.

• Trump’s “shoot first, ask questions later” approach to trade negotiations has caused the rest of the world to move away from running tiny fiscal deficits compared to the US (as mentioned above) and instead invest in defense, infrastructure, and generally protectionist government investments to make them more self-sufficient. Whether or not tariff talks de-escalate (like China), I believe the matter is settled and countries will continue to pursue this goal.

• Trump wants other countries to increase their defense spending as a percentage of GDP and contribute more to NATO spending, since the U.S. bears much of the cost. This would also increase the fiscal deficit.

I’m going to put aside my personal opinions on these points for now and focus on the implications that these narratives might have if we were to follow them to their logical end:

• Capital will leave dollar-denominated assets and flow back home. This means that U.S. stocks underperform relative to the rest of the world, bond yields rise, and the dollar weakens.

• This capital will flow back to where fiscal deficits are no longer constrained, and other modern economies will begin spending and printing money to finance these increased deficits.

• As the United States moves from a global capital partner to a more protectionist role, holders of dollar assets will have to increase the risk premium on these once perfect assets and mark them with a wider margin of safety. As this process proceeds, it will cause bond yields to rise, and foreign central banks will seek to diversify their balance sheets away from just US Treasuries and toward other neutral commodities such as gold. Similarly, foreign sovereign wealth funds and pension funds may also seek such diversification.

• The flip side of these arguments is that the US is the epicenter of innovation and technology-driven growth, and no country is going to overthrow that idea. Europe is too bureaucratic and socialist to pursue capitalism the way the US does. I sympathize with this view, and it probably means this is not a multi-year trend, but a medium-term one, as the valuations of these tech companies will have limited upside for some time.

Going back to the title of this post, the first trade is to sell the USD assets that the world is over-holding and avoid the ongoing deleveraging. Because the world is over-holding these assets, this deleveraging can become messy when risk limits are hit by more speculative players such as large money managers and multi-strategy hedge funds with tight stop losses. When this happens, we will see something like a margin call day, where all assets need to be sold to raise cash. Now, the strategy of the trade is to survive and stay well-funded.

However, as deleveraging subsides, the next step in the trade begins – a move toward a more diversified portfolio: foreign stocks, foreign bonds, gold, commodities, and even Bitcoin.

We have already started to see this dynamic take shape on market rotation days and non-margin call days. The US dollar index (DXY) fell, US stocks underperformed other regional stocks, gold surged, and Bitcoin performed unexpectedly well against traditional US technology stocks.

I believe that as this happens, marginal increases in global liquidity will shift to the exact opposite dynamic we are used to. Other regions will shoulder the burden of increasing global liquidity and risk appetite.

When I think about the risk of this diversification in the context of a global trade war, I worry about the tail risk of getting too deep into other countries risk assets because there are some big landmines in terms of potential bad tariff news. So this makes gold and Bitcoin the choice for global diversification in this shift.

Gold has been rising in absolute terms and is now reaching new all-time highs on a daily basis, reflecting this regime shift. However, while Bitcoin has been surprisingly resilient throughout the regime shift, its beta correlation with risk appetite has so far limited its performance, failing to keep up with gold’s performance.

So as we move towards a rebalancing of global capital, I believe the trade after that is Bitcoin.

When I contrast this framework with Howell’s correlation research, I can see how they fit together:

• The US stock market cannot be influenced by global liquidity, only liquidity as measured by fiscal stimulus plus some capital inflows (but we just identified aspects of this flow that could cease or even reverse). Bitcoin, however, is a global asset and reflects this broad perspective of global liquidity.

• As this narrative takes hold and risk allocators continue to rebalance, I believe risk appetite will be driven by other regions rather than the United States.

• Gold is doing really well, so for the part about Bitcoin related to gold, we can tick a box here as well.

In light of all this, I see for the first time in financial markets the potential for Bitcoin to break away from US tech stocks. I know this idea often marks a local apex for Bitcoin. The difference is that this time we see the potential for a major shift in capital flows that will make it lasting.

So for me as a risk-on macro trader, Bitcoin feels like the purest trade here. You cant put tariffs on Bitcoin, it doesnt care which border its on, it offers high beta to the portfolio without the current tail risk associated with US tech, I dont have to take a view on whether the EU can get its affairs in order, and it offers pure exposure to global liquidity, not just US liquidity.

This market regime is exactly why Bitcoin was created. Once the deleveraging dust settles, it will be the fastest horse, accelerating forward.

This article is sourced from the internet: Bitcoin after deleveraging, the next winner of global capital flows

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