--What are your thoughts on future trends in the crypto asset market in light of the current global and financial situation?
Kosei Matsuda (‘Matsuda’): Supply and demand balance is a factor in price fluctuations in the market, not just for Bitcoin.
In the case of Bitcoin, the number of issued coins has already been set at 21 million, and next year the number will reach its half-life and the speed of issuance will be halved.
I personally expect the price to rise to around USD 40,000-50,000 from now on, based on the supply side, from March to April next year. In terms of the current price (as of 1 November), I imagine it will rise by 20-50%.
In terms of demand, the bitcoin market currently depends on the monetary policy of the Federal Reserve (FRB).
The reason why the Fed's monetary policy is important is related to the largest fiscal stimulus and monetary easing in history with the new Corona.
Bitcoin reached its highest price in 2021, mainly due to the inflow of institutional money, mainly hedge funds, in the US, but as of around April 2020, there were growing observations that inflation would come as a result of this largest-ever monetary easing (printing more US dollars).
Against this backdrop, some investors invested their money in bitcoin in the process of considering hedging instruments. However, in November 2021, bitcoin reached a high and then fell.
This was just as tapering, i.e. the correction of excessive monetary easing, began.
There have been numerous rate hikes since then, but in November, interest rates were decided to remain unchanged for the second meeting in a row, and the prospect of a halt to interest rate hikes has intensified.
This is one of the factors pushing up the bitcoin price. Over the past 30 years, interest rates have been cut on average about nine months after the last rate hike.
In this light, assuming that July 2023 is the last rate hike, the interest rate could be lowered in April 2024. We believe that the bitcoin market price will also rise another notch at the time of the next rate cut.
BTC market price in terms of the Fed's monetary policy trends
Source: prepared by Rakuten Wallet from Bloomberg.
Two important points to keep in mind when following the market
--What are the key points when looking at the crypto asset market in 2024?
Matsuda: There are two key points: the first is the US presidential election. In the US, crypto-asset regulation has been delayed due to the partisan divide between the Democrats and Republicans. The authorities have no choice but to make decisions in accordance with laws from the 1930s and court precedents from 1946, when there was no computer, let alone the internet.
There is a view that applying draconian penalties at the discretion of the administration under such circumstances should be done with caution, and SEC (US Securities and Exchange Commission) Chairman Gensler took that stance until November 2023. However, since the collapse of the FTX, Chairman Gensler's attitude has changed abruptly.
He has taken a more authoritarian stance, known as ‘regulation by enforcement’, in which crypto-asset-related firms are sued without clear rules in advance, and has been criticised by pro-crypto-asset Republican legislators and others. It has been pointed out that the background to this was the intention of Senator Elizabeth Warren and other left-wing Democrats, who are crypto-asset deniers.
Given these circumstances, we believe that if the Republicans gain a majority in next year's elections, there is a greater chance that Chairman Gensler will also be removed from his position, which will be positive for the market. On the other hand, if the Democrats gain a majority, Chairman Gensler will probably stay on, but the situation will change depending on the situation within the party, so we should keep a close eye on political developments.
The second point is the situation in the Middle East.
Bitcoin has always been vulnerable to risk events such as war. This is because investors basically try to reduce the amount of risk in times of emergency and reduce their holdings of assets with high price volatility. However, the situation in the Middle East this time is different, as US Treasuries, which should originally be bought out of risk aversion, are unstable.
In addition, the Japanese yen, which has been described as a ‘safe asset’, has been weakening and the outlook is uncertain. Gold is a good example of a safe asset, but it has the disadvantage of low volatility, making it inefficient as a hedge.
Against this backdrop, there is a growing belief that investing in bitcoin is a ‘flight to quality’, as Larry Fink, CEO of BlackRock, puts it. I personally believe that the price of bitcoin will peak in 2025 due to the reduced supply caused by the half-life.
However, due to uncertainty over the situation in the Middle East and the election situation, we will have to lift the lid to see whether the rise towards 2025 will occur during 2024 or 2025.
--What kind of price transition do you envisage after bitcoin's half-life is over?
Matsuda: After the half-life, there tends to be a sell-the-fact (sell-off) of what was bought on the basis of expectations. The half-life also halves the earnings of miners who conduct mining operations, so there tends to be sell-offs by miners who can no longer make a profit.
Therefore, prices tend to stagnate for six months to a year after the half-life arrives. This time, too, prices are likely to peak around March/April, when the half-life is reached, and then sell off. We believe that it will be 2025 before the supply reduction starts to take effect and prices rise in earnest.
・Six months to a year after the half-life, miners' profitability deteriorates and the price slumps
・One to one and a half years after the half-life, supply decreases and the price peaks.
・Then stalls and bottoms 2 to 2.5 years after the half-life.
・Slowly rises from bottom to next half-life (⇐ here and now?)
--What developments/impacts can we expect in the future?
Matsuda: Looking back at the past, the current situation is similar to that of gold: the gold ETF that appeared in the US in 2004 was a breakthrough at the time and was very useful.
For institutional investors with a diversified investment portfolio, e.g. 50% in equities and 50% in bonds, it was impractical to buy physical gold bars and store them in a vault because it was too much work. However, when it came to ETFs, they could be bought through a securities account, making them a diversification option.
The same thing is expected to happen with Bitcoin, so there are high hopes that it will be able to take another step forward as an asset if it becomes a reality.
I mentioned earlier that institutional investors have started to buy bitcoin between 2020 and 2021, but the actual investors who are doing this are hedge funds, family businesses and other investors who can easily move their own holdings.
In contrast, for those who manage people's money in custody, such as pension funds, insurance companies and mutual funds, bitcoin is still too complicated to store and buy.
The realisation of physical bitcoin ETFs will make it easier for these investors to get in touch with it, and could change the market, which has traditionally been hedge fund-centric. However, people tend to misunderstand that ‘approval of a physical bitcoin ETF’ is not a ‘reason to buy bitcoin’, but only ‘makes it easier to buy’. It is important not to misunderstand that it only makes it ‘easier to buy’.
Also, because of expectations, sell-the-fact will occur when a physical bitcoin ETF is approved. The same dynamic was seen when bitcoin futures ETFs and gold ETFs were approved. Bitcoin physical ETFs will probably be approved this year and next, but once they start trading, caution is advised.
--What would you do if you were Matsuda-san?
Matsuda: I personally believe that the biggest reason why people are buying bitcoin is ‘distrust of legal tender’.
For example, the amount of Japanese yen issued has increased seven-fold over the past ten years. This means that the value of the yen has also decreased by a factor of seven, and it is not surprising that the exchange rate between the dollar and the yen has fallen to around 700 yen to the dollar. The reason why this has not happened, however, is that the amount of dollars issued has also increased six-fold over the same period.
Paul Tudor has also said that it is ‘OK to hold a few percent of your assets in bitcoin’ in case of an emergency, and that it is a good idea to hold bitcoin as a ‘spice’ in your portfolio. In terms of investment, if you love crypto-assets, you can't go wrong with bitcoin.
In terms of investment, if you love crypto assets and want to hold a variety of stocks, increasing the number of stocks you hold is a good idea.
However, if you want to include them as part of your asset management allocation, such as stocks and bonds, I think it would be better to basically only hold Bitcoin or even Ethereum.
I think it is hard to follow markets other than Bitcoin and Ethereum on top of investing in various other things such as currency and stocks.
Comparison of US and Japanese base money
Source: prepared by Rakuten Wallet from Bloomberg.
--What are the key areas to watch in 2024 in terms of existing traditional finance?
Matsuda: In a word, trust in legal tender, especially the accelerating ‘move away from the US dollar’.
There is a framework called BRICS, which consists of Russia, China and other countries, and it has been agreed that trade settlements between member countries will be made in their own currencies rather than in US dollars. Furthermore, as of 1 January next year, six new countries, including Saudi Arabia, will join this framework.
This may mean that oil trade between oil-producing countries such as Russia, Saudi Arabia, the UAE and Iran and importing countries such as China, India and Brazil will no longer be settled in dollars. A similar trend is being seen in ASEAN, where a summit meeting recommended that dollar-denominated transactions within the region be discontinued.
If these developments accelerate, they may also seek to stop holding US Treasuries in their foreign exchange reserves. It is widely known that China is currently reducing its holdings of US Treasuries against the backdrop of the current sell-off.
So there may be a move to hold bitcoin as a partial reserve asset, and before that, the demand for bitcoin as a receptacle for millionaires in such countries to shift their assets out of dollars will be even stronger from 2024 onwards.
--AI was a hot topic in 2023, what trends will emerge in 2024 and how do you think they will affect the crypto asset market?
Matsuda: I think we will see progress in the token economy.
At the moment, there is a growing interest in RWA (Real World Asset) tokens in particular, so this is an area to watch. I think the market for tokenising and trading goods will grow in the future. The more widespread it becomes, the more demand for bitcoin payments will increase.
On the other hand, there are concerns that in 2024 there will be a major event in the traditional financial industry, such as a ‘00 shock’.
The current situation resembles the atmosphere in 2007, and there is a good chance that a recession will arrive in the future: when Lehman Brothers collapsed in 2008, some people think that this triggered a recession, but they are mistaken. In fact, the US economy peaked in December 2007.
The recession came before the shock, and the Lehman Shock happened because of the growing strain. If the US economy has peaked out and is heading towards recession, there is a possibility of something like a 00 shock at some point.
--In 2023, the Silicon Valley Bank will fail in the US and the real estate recession in China is also accelerating, but do you think that an event on a larger scale than these could occur?
Matsuda: Yes. The sub-prime loan problem itself has been a concern since 2006, and a major event could have occurred at any time in 2007. The Lehman Shock was the last incident to occur. If interest rates continue to rise, the unrealised losses in the portfolio of the financial world as a whole will grow, and eventually we will not be able to stand still.
The current interest rate on the 10-year US Treasury note is about 1% higher than it was in March 2023, so naturally the unrealised losses are getting bigger. In China, too, concerns over real estate have been around for about 10 years, but the authorities and others have continued to put them off, and it is possible that they have finally lost their heads.
Even if we can manage to fake it while the economy is good, problems could erupt at an accelerated pace once the economy starts to deteriorate, so we think that 2024 is a year to watch out for. In the unlikely event that monetary easing takes place in such a situation, the price of bitcoin will rise even higher.
1.Depending on the outcome of the US presidential election in 2024, the US stance on crypto assets could change significantly. Also, political developments over the situation in the Middle East may attract demand for bitcoin, so keep an eye on political developments.
2.Caution is required after the approval of the Bitcoin physical ETF and after Bitcoin's half-life, as selling pressure is likely to increase in both cases. In terms of supply and other factors, bitcoin could reach a high in 2025.
3.The current global economy is very similar to that of 2007, and there are concerns that a global recession will hit in 2024. If there is a turn to large-scale monetary easing at that time, the bitcoin price will rise further. The trend of interest rate hikes, particularly in the US, needs to be monitored.
Yasuo Matsuda
Studied international monetary systems at the University of Tokyo's Faculty of Economics. He has been involved in analysing and forecasting the crypto asset market at a crypto asset exchange since 2018, forecasting a peak of 8 million yen in 2021 and 5 million yen at the end of the year, and almost hitting the target.
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