Be Wary of Exaggerated Predictions on Bitcoin Prices and RMB Exchange Rates

Bitcoin’s criticism of the traditional monetary system is not correct. The disadvantages of Bitcoin itself may outweigh the advantages for society. Bitcoin will continue to evolve and have existential value, and will primarily face competition from central bank fiat digital currencies in the future.

Be Wary of Exaggerated Predictions on Bitcoin Prices and RMB Exchange Rates

The core view

  1. Bitcoin’s criticism of the traditional monetary system is not correct, and the disadvantages of Bitcoin itself may outweigh the advantages for society.
  2. Maintain the view that the USD/CNY exchange rate will fluctuate between 6.3-6.7 this year. In the future, there are many market and policy factors affecting the exchange rate, and the RMB may both appreciate and depreciate.

3, it is recommended that we invest rationally, and should be guided by the expected return on long-term investments, the cost and expected return on imports and exports, and the actual needs of life to foreign exchange transactions. Even if you allocate high-risk assets like bitcoin, you should limit your position and avoid leverage.

Full Article

Bitcoin was created after a certain stage of monetary evolution, economic thought, and technological reserve development, as a result of the 2008 financial crisis and the rise of anti-Wall Street, anti-establishment, and anti-inflationary thinking after the Federal Reserve bailout kicked in, and with the genius invention of Satoshi Nakamoto.

While the price of Bitcoin has risen far more than any asset known to man over the past 12 years, it is also feared to be far more volatile than all assets over the same period. Bitcoin has experienced four price spikes and drops since its inception in 2009, with each spike associated with monetary easing and celebrity celebrity push, and each crash closely related to Bitcoin’s inherent flaws, tightened financial conditions and increased regulation.

We now know that Bitcoin was created based on criticism of the traditional monetary centric system and concerns about inflation brought on by quantitative easing, but in reality, the advantages of the traditional monetary centric system as a product of the evolving economic and financial development of mankind far outweigh the disadvantages, and quantitative easing did not bring on hyperinflation.

In fact, the market debate about inflation so far this year has remained largely based on the traditional thinking that monetary over-issuance inevitably brings inflation, and I have written several times about the shortcomings of this view.

In turn, Bitcoin’s purported advantages of “decentralization” have resulted in high transaction costs, high energy consumption, centralized pricing power, and price spikes and drops.

However, this does not mean that Bitcoin has no value in existing (Warren Buffett’s judgment on Bitcoin is similarly emotional). With the rise of the virtual world playing an increasing role in our lives, Bitcoin and other cryptocurrencies have developed a whole ecosystem of trading assets similar to stocks, bonds, gold, etc. Although the total market capitalization of cryptocurrencies is still small compared to financial markets and gold, Bitcoin at its high point could rank as the sixth largest publicly traded company in the world. Combined with the fact that the most fundamental difference between animals like humans and other animals is that the former believe in “stories” and have “creativity” and “faith”, even under strict regulation, a few cryptocurrencies have There is room for a few cryptocurrencies to survive even under strict regulation.

Bitcoin has also shown resilience and anti-fragility over the past 12 years. Therefore, I see three possibilities for Bitcoin’s future development.

  1. become a kind of pricing anchor in the virtual world with the dual function of virtual currency and virtual commodity, corresponding to the role of gold in the current legal tender.

2, possibly becoming an asset allocation for institutional investors and a hedge against inflation or dollar risk with its own return and risk characteristics.

3, to become an intermediary for cross-border and cross-border transactions of large amounts of commodities, as such transactions traditionally rely on banks, with long transaction times and relatively high costs.

The future development of Bitcoin will be closely tied to the attitude of regulation and the development of legal digital currencies by central banks. In fact, the criticism of the traditional monetary system by Bitcoin proponents could be well addressed by a fiat digital currency, further optimizing the existing monetary system.

There have been a number of recent strict regulatory provisions for the Bitcoin side of the equation, in addition to the well-known ones, on Wednesday, Gary Gensler, the new U.S. Securities and Exchange (SEC) chairman, stated during an appearance at a U.S. House of Representatives hearing that.

“There are many challenges and gaps in investor protection in the cryptocurrency market. Tokens currently on the market can be issued, sold and traded without complying with federal securities laws. In addition, no exchange that trades crypto tokens has yet registered as an exchange with the SEC. This all significantly reduces investor protections compared to traditional securities markets, and correspondingly increases the opportunity for fraud and manipulation. the SEC has prioritized token-related cases of fraud by design or other significant harm.

In summary, it is the Gensler-led SEC that looks to work with other regulators and Congress to fill the gaps in the cryptocurrency market in the area of investor protection. This is not exactly good news for supporters of cryptocurrencies like Bitcoin.

We’ve analyzed Gensler’s career in detail, and he’s been one of the toughest regulators on Wall Street in the last 20 years, bar none. Previously, people in the cryptocurrency community viewed Gensler’s SEC chairmanship as a boon for Bitcoin, as the cryptocurrency community has really reached a point in its development where it needs regulation, and Bitcoin, as the leader, will enjoy a boon due to the reduction of competitors brought about by regulation. However, such a view only applies if Bitcoin itself is fully compliant, but I’m afraid that’s not the case.

Incidentally, Gensler also pointed to tighter regulation of SPACs during the congressional hearings. This is not really surprising, as our previous research article has pointed out that the SPAC form of IPO benefits the SPAC sponsor and the institutions involved in the first round of IPO investments, but the price of a more rapid IPO for a public company that is merged by an SPAC is that the cost of going public is actually higher than a traditional IPO.

The reason for this is that the investment institutions involved in the first round usually exit early and the listed company actually raises less money than a traditional IPO. More importantly, Gensler also notes that research has found that retail investors who participate in the second round after a merger typically suffer investment losses.

Another topic of particular interest to investors recently has been the A-share and RMB trend. Obviously, the recent A-share trend has benefited in part from the government’s introduction of strict regulatory policies against cryptocurrencies, as well as measures to curb the rise in commodity prices. In fact, the recent fall in commodity prices and the easing of global inflation concerns are also external factors in the global stock market rebound. Ultimately, however, the most central factor in the recent strength of A-shares has been the strengthening of the RMB and the renewed inflow of foreign capital.

We clearly pointed out in our investment strategy video at the beginning of the year that the USD/CNY exchange rate should fluctuate between 6.3 and 6.7 this year. Fundamentally, it is more likely that the dollar will enter a depreciation cycle, but technically, the dollar will not depreciate as quickly and sharply as the market believes. This is the view we have maintained this year.

The recent strength of the yuan is mainly due to the depreciation of the dollar index since April, from 93.3 to below 90 now, but we should also see that the yuan has not increased significantly against the euro, pound and Australian dollar. Even if the dollar is weak, we think it is unlikely that the dollar will fall below 6.3 against the yuan this year.

On the one hand, it is well known that a stronger yuan is not good for exports, and there is a view that a stronger yuan is good for curbing commodity price increases, but this is not a recipe. If global inflation does emerge in the future, appreciation now would lose the space to reduce imported inflation through exchange rate policy.

Of course, if U.S. inflationary pressures rise further, it is possible that some tariffs on Chinese imports could be eliminated, which would naturally benefit RMB appreciation, but U.S. inflation would also mean a strong U.S. economic recovery and rising U.S. Treasury yields, which would also benefit the dollar. In addition, the U.S. government is unlikely to revoke tariffs on Chinese imports until Biden’s American Jobs and Families plan seeks congressional approval.

On the other hand, we need to see that the USD/CNY 6.3 has been a low point for the USD exchange rate over the past few years and has continued to rebound after briefly falling below it in early 2018. the USD depreciated in 2017 amid the global economic recovery, while the USD appreciated in 2018 amid the global economic slowdown, all in line with the historical pattern of the USD.

For now, the U.S. economy is performing better than expected under the global impact of the epidemic, as well as better than other developed economies, and the dollar index is easy to rise and hard to fall. Only when the global economy is in recovery will the dollar return to the depreciation cycle.

It is worth mentioning that recent investor expectations for RMB appreciation were largely encouraged by the views of central bank officials in their speech at last month’s Moganshan conference, with the core proposition that the RMB will be internationalized in the future and that the RMB exchange rate will continue to appreciate relative to the USD in the medium to long term. Subsequently, an economic essayist’s view that the RMB exchange rate could appreciate to 3 by 2024 went viral, prompting some to consider dumping the dollar.

I have already commented on this idea in my article “Why Exaggerated RMB Exchange Rate Predictions Are Going Viral”. I have reservations about the word “sustained”, and we should be clear that “medium to long term” in the economic and policy context could be 3-5 years from now, or 5-10 years from now. In particular, I have emphasized that exchange rates are unpredictable in both the short and medium to long term.

Just this Wednesday, the seventh working meeting of the national foreign exchange market self-regulatory mechanism was held in Beijing. The meeting concluded that

“The current foreign exchange market is generally balanced. In the future, there are many market and policy factors affecting the exchange rate, and the RMB may both appreciate and depreciate. No one can accurately predict the trend of the exchange rate. Whether in the short or medium to long term, it is inevitable that the exchange rate will not be measured, and two-way fluctuations are the norm, whether by the government, institutions or individuals, to avoid being misled by the forecast conclusions.

A managed floating exchange rate system based on market supply and demand, adjusted by reference to a basket of currencies, is suitable for China’s national conditions and should be adhered to in the long term. Under this exchange rate system, the exchange rate cannot be used as a tool, neither for devaluation to stimulate exports nor for appreciation to offset the impact of rising commodity prices. The key is to manage expectations and resolutely combat all kinds of malicious manipulation of the market and malicious creation of unilateral expectations.”

All in all, we always insist on advising people to invest rationally and should be guided by the expected return on long-term investments, the cost and expected return on imports and exports, and the actual needs of life to trade forex. Even when allocating to high-risk assets like bitcoin, it is important to limit positions and avoid leverage. For companies listed through SPAC, do not rely solely on pre-merger price movements to judge future trends, but return to macro and fundamental analysis of the industry to which the listed company belongs, and more critically, understand the listed company’s own financial performance and future development prospects.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/be-wary-of-exaggerated-predictions-on-bitcoin-prices-and-rmb-exchange-rates/
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