Author: @Web3_Mario

 

Summary: In recent days, the cryptocurrency market has experienced a significant correction. The market consultation is chaotic, and coupled with continuous large-scale hacker attacks in the cryptocurrency sector, it brings difficulties in understanding the recent market trends in the short term. In response, I have some opinions to share and discuss with everyone. I believe the main reasons for the current pullback in the cryptocurrency market are twofold: firstly, from a micro perspective, the consecutive hacker attacks have triggered concerns among traditional funds, increasing risk aversion; secondly, from a macro perspective, DeepSeek's open-source week has further punctured the AI bubble in the U.S., combined with the actual policy direction of the Trump administration, which has ignited market concerns about U.S. stagflation and initiated the revaluation of Chinese risk assets.

 


I believe everyone still remembers the recent hacking incidents involving Bybit and Infini. There has been much discussion about this, so I won't elaborate further. Here, I will briefly discuss the impact of the stolen funds on these two companies and the industry as a whole. Firstly, for Bybit, while 1.5 billion dollars is roughly equivalent to its net profit for about a year based on its scale, it is certainly not a small sum for a company in an expansion phase. Typically, companies maintain cash reserves sufficient for three months to a year; considering the high cash flow nature of exchange businesses, its cash reserves are likely closer to the left-side level. Let's take a look at Coinbase's 2024 financial report for some preliminary judgments. Coinbase's total revenue for 2024 more than doubled compared to last year, reaching 6.564 billion dollars, with a net profit of 2.6 billion dollars. In terms of expenses, total operating expenses for 2024 were 4.3 billion dollars.

 

If we refer to the data disclosed by Coinbase, and combine it with Bybit's current expansion phase, spending control will be more aggressive. It is estimated that Bybit's cash flow reserve is ideally between 700 million to 1 billion dollars. The 1.5 billion dollars in user funds lost clearly cannot be covered solely by its own funds. At this time, funding borrowing, equity financing, or shareholder injections will be necessary to navigate this crisis. However, regardless of the model, considering the concerns about the sluggish growth of the cryptocurrency market by 2025, the resulting funding costs are likely to be significant, and this will undoubtedly bring certain burdens to future business expansions.

 

Of course, today we saw the news that the core vulnerability of the attack was in Safe and not in Bybit itself. This may provide some incentive to recover some losses, but a significant issue troubling the cryptocurrency industry is the imperfect legal framework. Therefore, the related litigation process will undoubtedly be lengthy and costly. Attempting to recover losses is unlikely to be an easy task. As for Infini, clearly a loss of 50 million dollars is an unbearable burden for a startup, but it seems that the founder is financially strong, and relying on investment to weather the storm is indeed a rare feat.

 

These two consecutive large losses seem to have become commonplace for traders in the cryptocurrency market, who are already accustomed to high risks. However, it has clearly shaken the trust of traditional funds. Specifically, the flow of funds in BTC ETFs can illustrate this; since the attack on the 21st, it has clearly triggered a significant outflow of funds. This indicates that the impact of this incident on traditional investors is likely to be negative. If the resulting concerns focus on whether it will hinder the progress of developing a regulatory-friendly legal framework, then this is a serious matter. Therefore, it can be said that the hacking incident is the trigger for this round of correction at a micro level.

 

 

 

Macro level: Intensified geopolitical competition among major powers; DeepSeek's open-source week reconstructs the competitive landscape of the AI sector; and the liquidity migration under the resonance of the revaluation phase of Chinese risk assets.

 

Now let's look at some impacts on a macro level. The conclusion is that it is evidently unfavorable for the cryptocurrency market in the short term. In fact, after some observation, it seems that the Trump administration's policy direction has become clearer, which is to achieve internal integration and industrial restructuring through strategic contraction, thereby enabling the U.S. to gain the ability to reindustrialize. This is because technology and production capacity are the core factors in major power competition. The most crucial element in achieving this goal is 'money', which primarily reflects in the U.S. fiscal situation, financing capabilities, and the real purchasing power of the dollar. The interrelationship among these three factors is mutually reinforcing, making it not easy to observe changes in related processes. However, by carefully unraveling these threads, we can still outline some core concerns:

 

1. U.S. fiscal deficit issue;

2. U.S. stagflation risk;

3. Trends in the strength and weakness of the dollar;

 

Firstly, let's look at the U.S. fiscal deficit issue. This issue has been analyzed extensively in previous articles. Simply put, the core reason for this round of the U.S. fiscal deficit problem can be traced back to the extraordinary economic stimulus measures taken by the Biden administration to cope with the COVID-19 pandemic, and the Treasury Department, represented by Yellen, adjusting the U.S. debt issuance structure, leading to an inversion of interest rates due to the excessive issuance of short-term debt, thereby harvesting wealth globally. The specific reason is that the excessive issuance of short-term debt depresses short-term U.S. Treasury prices on the supply side, thus raising short-term U.S. Treasury yields. The increase in short-term U.S. Treasury yields naturally attracts dollars to flow back to the U.S., as one can enjoy excess risk-free profits without losing time costs. This temptation is significant, which is why capital, represented by Buffett, chose to sell off risk assets in large quantities during the previous cycle and increase cash reserves. This has created immense pressure on exchange rates for other sovereign countries in the short term. To avoid excessive depreciation of exchange rates, central banks in various countries have had to sell short-term debt at a discount, turning unrealized losses into realized losses to regain dollar liquidity and stabilize exchange rates. Overall, this is a global harvesting strategy, especially targeting some emerging countries and trade surplus countries. However, this approach also has a problem: the debt structure of the U.S. will lead to a sharp increase in short-term repayment pressure, as short-term debt must be repaid in full with interest, which is the origin of the debt crisis triggered by this round of U.S. fiscal deficit, and can be said to be a bomb left for Trump by the Democratic Party.

 

The greatest impact of the debt crisis lies in its effect on U.S. credit, thus reducing its financing capacity. In other words, the U.S. government needs to pay higher interest rates to finance through Treasury bonds, which overall raises the neutral interest rate in U.S. society. This neutral rate cannot be influenced by the Federal Reserve's monetary policy. The elevated neutral rate places immense pressure on corporate operations, leading to stalled economic growth, which in turn transmits to the general public through the job market, ultimately triggering contraction in investment and consumption. This creates a negative feedback loop that can lead to economic recession.

 

The focus of observation on this main line is how the Trump administration reshapes U.S. fiscal discipline and addresses the fiscal deficit issue. The specific policies involved include the DOGE Efficiency Department led by Musk, the process of reducing U.S. government spending and cutting redundant staff, and the economic impact during this process. Currently, it seems that Trump's internal integration efforts are very strong, and reforms have entered a deep-water phase. Here, I will not elaborate on tracking progress, but will introduce some of my observational logic.

 

1. Pay attention to the aggressiveness of the Efficiency Department's policy advancement, such as if layoffs and reductions are too drastic, it will inevitably cause short-term concerns about economic prospects, which is usually unfavorable for risk assets.

2. Pay attention to the feedback of macro indicators on its policies, such as employment data and GDP data.

3. Pay attention to the progress of tax reduction policies.

 

We cannot underestimate the impact of government spending and government employees on the U.S. economy. Typically, we might think that China's government spending as a percentage of GDP is higher than that of the U.S., but this is actually a misconception. U.S. government spending accounts for 17.2% of GDP, while China's is 16.51%. Government spending usually transmits through the industrial chain to the entire economic system. The structural differences between the two primarily reflect that consumption accounts for a large share of U.S. GDP, while imports and exports account for a larger share of China's GDP. This represents two different approaches to stimulating the economy: for the U.S., expanding external demand and increasing exports is a method to boost the economy, while for China, there is still significant potential to tap into domestic demand.

 

Consumption is the same. In this chart, we can see that the salary levels of government departments are not low across the entire industrial chain, and reducing redundant government employees also impacts U.S. economic growth on the consumption side. Therefore, overly aggressive policy advancement will inevitably evoke fears of an economic recession. Some matters require a slow approach to resolve, but they must also align with the overall rhythm of the Trump administration's policy advancement. As for the progress of tax reduction policies, it currently appears that Trump's focus is not on this, so the concerns regarding short-term income reduction do not seem significant but should be monitored.

 

 

Secondly, there are concerns about the U.S. stagflation issue. Stagflation refers to a situation where economic growth stagnates while inflation intensifies, which is unacceptable in terms of the misery index. Besides the impact mentioned earlier regarding government spending cuts on economic growth, there are several important points to consider:

 

1. How will DeepSeek further impact the AI sector?

2. The progress of the U.S. sovereign wealth fund.

3. The impact of tariff policies and geopolitical conflicts on inflation.

 

Among them, I believe the most significant impact in the short term is the first point. Friends interested in technology may know that during DeepSeek's open-source week, numerous results were extremely shocking, but they all pointed to one thing: AI's demand for computing power has greatly decreased. This has allowed the stock market to remain stable during the past interest rate hike cycle in the U.S. due to the enormous narrative surrounding the AI sector and the monopolistic nature of the U.S. in the upstream and downstream of the AI sector. The market gives stocks related to the U.S. AI sector extremely high valuations, naturally fostering optimism about a new round of economic growth driven by AI in the U.S. However, all this will be reversed by DeepSeek, and the biggest impact of DeepSeek lies in two aspects: on the one hand, it greatly reduces the requirements for computing power, which significantly retracts the performance growth potential of upstream computing power providers represented by Nvidia. On the other hand, it breaks the U.S.'s monopoly on AI downstream algorithms through open-source means, thus suppressing the valuation of algorithm providers represented by OpenAI. Moreover, this shock has just begun, and we will have to see how the U.S. AI sector responds, but in the short term, it has already shown a retraction in U.S. AI stock valuations and a return in Chinese tech stock valuations.

 

In fact, for a long time, the U.S. has suppressed the valuations of Chinese companies through public opinion, keeping them in an undervalued state. However, benefiting from the grand narrative brought by DeepSeek for the upgrade of Chinese manufacturing, along with the relatively mild stance of Trump's policies on China-related issues, geopolitical risks have decreased, and the valuations of Chinese and U.S. companies have shown a return. According to a report from CICC, the recent surge in Hong Kong stocks has mainly benefited from southbound capital, that is, capital inflows from the mainland, as well as the influx of passive capital from abroad. However, overseas active funds have not shown significant changes due to Trump's investment restrictions on Chinese companies. Nonetheless, observing liquidity is also very important, as there are many ways to bypass direct investment and enjoy the dividends of the re-evaluation of Chinese company valuations, such as investing in Singapore or other related markets. Changes in fund flows can be easily identified through the Hong Kong dollar exchange rate. We know that the Hong Kong dollar operates under a linked exchange rate system with the U.S. dollar, meaning the exchange rate of the Hong Kong dollar against the U.S. dollar will stabilize between 7.75 and 7.85. Therefore, as the Hong Kong dollar approaches 7.75, it indicates a stronger willingness of foreign capital to invest in Hong Kong stocks.

 

 

The second point worth noting is the construction status of the U.S. sovereign wealth fund. We know that sovereign wealth funds are a good supplement to government revenue for any sovereign country, especially for trade surplus countries with large dollar reserves. In the ranking of the world's top ten sovereign wealth funds, China has 3, the Middle East has 4, and Singapore has 2. The top-ranked is Norway's Government Pension Fund Global, with a total asset size of about 1.55 trillion dollars. However, due to the constitutional framework of the U.S. federal government, establishing a sovereign wealth fund is quite challenging since the federal government can only receive direct taxes, and its revenue sources are limited. Currently, the U.S. is also experiencing the embarrassment of fiscal deficits. However, Trump seems to have instructed the Treasury Department to establish a trillion-dollar sovereign wealth fund. This is naturally also a means to alleviate the fiscal deficit. However, the question here is where the money will come from and what it will be invested in.

 

Currently, according to U.S. Treasury Secretary Basant's remarks, it seems that he hopes to reprice U.S. gold reserves, thus providing 750 billion dollars in liquidity for the sovereign fund. The reason behind this is that according to Title 31, Section 5117 of the U.S. Code, the legal value of the U.S. government's 8,133 tons of gold is still 42.22 dollars per ounce. If calculated at the current market price of 2,920 dollars per ounce, the U.S. government would have an unrealized return of 750 billion dollars. Therefore, by amending the law, additional liquidity can be obtained. This can be considered a clever approach. However, if this is approved, the dollars used for investment or alleviating debt pressure will inevitably come from selling gold, which will certainly affect the trend of gold prices.

 

As for what to invest in, I believe it is highly likely to focus on the goal of returning production capacity to the U.S. Therefore, the impact on Bitcoin may be limited. In previous articles, I have analyzed that in the short to medium term, the value of Bitcoin relative to the U.S. is as a safety net for the economy. This is based on the premise that the U.S. has sufficient pricing power over this asset. However, in the short term, there is no apparent economic recession, which is not the main focus of Trump's policies but rather an important tool to navigate through the painful reform period.

 

Lastly, regarding tariffs, tariff concerns have indeed been well exchanged. Currently, it seems that the tariff policy is more of a bargaining chip for Trump's negotiations rather than a necessity. This can be seen from the relatively restrained tariff rates imposed on China. Trump seems to consider the impact of high tariffs on internal inflation. The next point I am interested in is the tariffs on Europe and what returns the U.S. can exchange for this. I am also concerned about the EU's process of rebuilding its independence; harvesting Europe to restore its own strength is the first step for the U.S. to participate in this major power competition. As for inflation risk, although the CPI has risen for several consecutive months, considering that it remains at a controllable level and coupled with the easing nature of Trump's tariff policy, the current risk does not seem significant.

 

Finally, let's discuss the trend of the dollar, which is a critical issue that requires continuous observation. In fact, the debate over the strength and weakness of the dollar under Trump's new term has been ongoing. Some key figures have significantly influenced the market. For example, Trump's newly appointed economic advisor and chief of the White House Economic Advisory Council, Stephen Miller, stated that the U.S. needs a weak dollar to boost exports and facilitate internal reindustrialization. After causing panic in the market, U.S. Treasury Secretary Basant reassured the market during an interview on February 7, stating that the U.S. will continue its 'strong dollar' policy, albeit with the yuan being somewhat undervalued.

 

In fact, this is a very interesting matter. Let's look at the impact of a strong versus weak dollar on the U.S. economy. Firstly, a strong dollar has two main effects, particularly on asset prices. With the appreciation of the dollar, dollar-denominated assets will perform better. For the U.S. government, this mainly benefits U.S. Treasury bonds and globally oriented U.S. stocks, thus increasing market enthusiasm for purchasing U.S. Treasury bonds. Secondly, in terms of industry, the stronger purchasing power of the dollar benefits U.S. global enterprises by reducing costs, but it undermines the competitiveness of domestic industrial products in international markets, which is detrimental to internal industrialization. The impact of a weak dollar is the opposite. Considering that Trump's overall policy conception is based on returning production capacity and enhancing competitiveness in major power competition, a weak dollar policy seems to be the answer. However, there is a problem: a weak dollar will lead to the devaluation of dollar-denominated assets. Given the current fragility of the U.S. economy and financing pressures, a rapid weak dollar policy could prevent the U.S. from overcoming the pain period brought about by reforms.

 

Here is a representative event to illustrate this pressure. In Warren Buffett's annual letter to shareholders on February 25, he expressed dissatisfaction with the U.S. fiscal deficit issue, which clearly intensified market concerns. We know that Buffett's recent strategy has been to clear out overvalued risk assets in the U.S. in exchange for more cash reserves allocated to short-term U.S. Treasury bonds, along with some allocations to Japan's five major trading companies. However, this is also a form of interest rate arbitrage, which I won't elaborate on here. What I want to say is that Buffett's views have a strong influence in the market, and capital overly allocated to the dollar naturally shares a unified concern about the dollar's real purchasing power, that is, concerns about dollar depreciation. Therefore, the pressure of entering a depreciation channel too quickly is significant.

 

However, regardless of how to exchange space for time, gradually reducing debt will be a choice for both China and the U.S. The dollar's trend will likely follow a pattern of first strengthening and then weakening. The changes in dollar-denominated assets will also move along with this cycle. Cryptocurrency is one of the assets affected by this wave.

 

Finally, I would like to share my views on the cryptocurrency market. I believe there are too many uncertainties in the current market, so individual investors can adopt a barbell strategy to enhance the anti-fragility of their investment portfolios. On one hand, allocate to blue-chip cryptocurrencies or participate in some low-risk DeFi yields; on the other hand, take small positions to invest in some high-volatility assets. As for the short-term market trends, numerous adverse factors have indeed led to some price pressure, but there doesn't seem to be any clear structural risks. Therefore, if the market experiences excessive pullbacks due to panic, appropriately building positions could also be a choice.