The most significant event last week was the trade negotiations between the U.S. and China, resulting in mutual tariff reductions. However, Bitcoin, due to its safe-haven property, did not rise as much as the U.S. stock market. Instead, it followed a corrective path similar to gold, but the price still held steady around $103,000, indicating that demand for Bitcoin remains high. We judge that the buying power still primarily comes from institutional ETFs, and the influence of retail investors is no longer as significant as in the past. On-chain data also shows that these smaller market participants are finally reappearing, which may indicate that Bitcoin still has room for short-term increases, but it may also represent that this cycle is nearing its peak.
U.S. CPI data slightly exceeded expectations, raising market expectations for interest rate cuts, but had little impact on Bitcoin prices, which remained around $104,000. On Thursday, it was reported that long-term holders began selling, causing prices to briefly fall to $101,500, before quickly rebounding, now again approaching $104,000. Overall, the market is experiencing significant volatility, but Bitcoin remains relatively strong.
It is noteworthy that although Bitcoin's increase is not large, Ethereum still retains its "risk asset" attributes. After the U.S.-China negotiations were reached, Ethereum surged, increasing by as much as 20% in a single day, with prices reaching a high of $2,700, before subsequently correcting to $2,400, with the weekly increase narrowing to 6.5%. This indicates that the investment attributes of Bitcoin and Ethereum, along with other competing coins, have changed.
Although the market situation is quite good, last week Coinbase took a sharp downturn, first becoming the first cryptocurrency company to be included in the S&P 500 index, replacing Discover Financial Services, which is about to be acquired by Capital One. After the announcement, Coinbase's stock price surged nearly 20% because funds tracking the index must passively buy stocks of included companies, boosting short-term demand and prices.
The next day, Coinbase disclosed that it encountered a significant security incident on May 14, where attackers used social engineering to infiltrate internal systems and obtain very detailed user information. They even extorted victims afterward, demanding a ransom of $20 million from Coinbase. After being refused, the company offered a $20 million reward for information. Although this incident affected less than 1% of monthly active users, Coinbase's stock price rebounded afterward, and currently, this incident does not appear to be severe.
On the other hand, the Fed also made its latest statements last Thursday, indicating that the current tariff war, prices, and corresponding interest rate policies present opportunities for further Bitcoin price increases. As long as the Fed is willing to cut interest rates, there will be opportunities to push Bitcoin prices higher. Next, let’s discuss the script progress of the Fed and the tariff war.
A. On May 14, the U.S. April price index was released, and the trend is still under observation.
The U.S. released the latest April price index report, which showed that inflation performance was relatively mild. The Consumer Price Index (CPI), seasonally adjusted, rose by 0.2%, in line with market expectations, while the year-on-year increase dropped to 2.3%, the lowest in four years, primarily due to the year-on-year decrease in gasoline prices, which helped cool overall inflation. Core inflation (excluding food and energy) rose by 2.8% year-on-year, also in line with forecasts, and the market's response, including that of the cryptocurrency market, was minimal.
Although the data appears stable on the surface, economists generally believe that there is still little comfort to be gained from this, as there are still many potential risks in the future. The impact of tariffs has not yet shown up in commodity prices, and even though some tariffs have been suspended after Trump, the market and businesses feel uneasy about the inconsistency. Analysis points out that current prices have not fully reflected the new tariff costs, and many businesses have not yet passed the increased costs on to consumers. The true pressure of inflation may emerge in the summer.
The market's response to inflation data has been muted, reflecting investors' wait-and-see attitude towards future impacts. The Federal Reserve has chosen to maintain its interest rate policy unchanged while assessing inflation and economic risks, observing subsequent developments. If not for tariff factors interfering, the current data could have supported interest rate cuts. Despite Trump calling for rate cuts and emphasizing price declines, the Fed is more concerned with the long-term impacts of tariffs on corporate and consumer behavior, and decisions will still depend on actual price trends in the coming months.
B. On May 15, CryptoQuant reported: Retail confidence is returning, optimistic about Bitcoin's upward trend.
According to data from the on-chain analysis platform CryptoQuant, as BTC continues to rise, retail investors are gradually returning. Reports show that historically, active participation from retail investors has always played a key role in the major upward trends of Bitcoin bull markets, especially that part of the momentum during bull markets comes from retail investors. Although retail activity in the Bitcoin market has been low over the past three months, the situation is changing.
Analyst Carmelo Alemán pointed out that retail investors most sensitive to market fluctuations (holding between $0 and $10,000) have started to buy significantly since Bitcoin's rebound on April 9. Between April 28 and May 13, retail purchases increased by 3.4%, indicating a recovery of confidence in Bitcoin's prospects, further boosting buying power and potentially leading to the next wave of price increases.
Additionally, the return of retail investors may also indicate that a bull market is either underway or just beginning. If Bitcoin continues to rise, it will attract more retail investors into the market, not only pushing up BTC prices but also potentially driving capital into DeFi, staking, futures, and other crypto products, initiating a new wave of mass adoption in the entire crypto market. Currently, Bitcoin's price is around $103,000, and retail investors are actively buying.
C. On May 16, Arthur Hayes predicted that Bitcoin will reach $1 million before 2028.
Former BitMEX CEO Arthur Hayes predicts that Bitcoin will rise to $1 million before 2028. This time he believes the reason is not due to ETFs or institutional investment, but rather the U.S. will implement capital controls, continue its tariff policies, and the Trump administration may adopt taxation on foreign capital, such as stocks, bonds, and real estate, to address the trade deficit. This will drive capital away from traditional assets into borderless assets like Bitcoin and gold.
Arthur estimates that if the U.S. imposes a 2% tax on foreign capital, it could generate $600 billion in tax revenue, enough to exempt the income tax for the bottom 90% of Americans, compensating for the current stagnation in tariff negotiations under Trump’s policies. Additionally, the tax rates obtained from negotiations are insufficient to meet Trump's commitment of "income tax exemptions for households earning under $150,000."
However, this policy will lead to the withdrawal of foreign capital and the depreciation of dollar assets, forcing the Fed to restart quantitative easing to maintain market stability. Unlike gold, which needs to be stored, Bitcoin, as a digital asset, is more suitable for cross-border capital flow, possessing advantages in a future world characterized by high geopolitical tensions and potential capital division. He is optimistic that Bitcoin can surge to $1 million.
The Fed will redefine its interest rate policy, potentially increasing its tolerance for inflation.
Federal Reserve Chairman Powell stated that the inflation and interest rate environment has significantly changed after the pandemic, prompting the Fed to re-examine its framework for setting interest rate policies. This framework, established in 2012 with a 2% inflation target, was later updated in 2020 to an "average inflation targeting" system, allowing inflation to moderately exceed 2% to compensate for previously low levels.
However, the economic restart after the pandemic in 2021 led to inflation soaring to 6%, rendering this strategy ineffective. Powell stated: "The idea of intentionally allowing inflation to moderately exceed the target has become practically irrelevant." The interest rate policy framework established five years ago is clearly not applicable to the currently more complex economic environment.
Therefore, the Fed is expected to begin reassessing this year. The Fed stated that it will not immediately affect current interest rate decisions, with results likely to be announced in August or September. We believe that under the new framework, the Fed will allow for higher inflation rates to avoid severe economic recession or massive unemployment, introducing more flexibility for dynamic adjustments rather than pinning market expectations to a 2% inflation target.
Meanwhile, the U.S. and China reached a temporary ceasefire agreement in Geneva, pausing tariffs for 90 days starting in April. Average tariffs on U.S. goods imported from China were reduced from 145% to 30%, while China's tariffs dropped from 125% to 10%. China considers this a strategic victory in their trade war and injects short-term momentum into the economy. The agreement alleviates export pressure, raising this year's growth forecast for China's economy from 4.1% to 4.3%. However, economists warn that if future negotiations fail, the U.S. may still reinstate tariffs. We believe the time pressure remains on the U.S. side, as price pressures are brewing.
High tariffs have already impacted the prices of consumer goods in the U.S. Retail giant Walmart stated that tariffed products are being put on shelves, and a rare price increase wave is expected in early summer. Prices for certain products, such as bananas, have already risen. Walmart and other retailers, such as Ford and Hermès, have begun adjusting prices, and more retailers will announce relevant strategies in the coming weeks. Despite rising inflation, Walmart's sales remain strong, with a 4.5% year-on-year increase in same-store sales in early May, demonstrating its pricing competitiveness and market resilience.
However, consumer confidence continues to decline. The University of Michigan's early May index fell to 50.8, below expectations, marking a historical second-lowest point. Nearly three-quarters of respondents cited tariffs as the main reason, significantly higher than last month's 60%. Inflation expectations also rose to 7.3%, with long-term expectations showing divergence influenced by political positions. Despite some agreements making investors optimistic, overall sentiment remains pessimistic, reflecting increased pressure on people's livelihoods due to high prices and uncertainty about the future economic outlook.
However, we do not believe this is bad news for the cryptocurrency market. The decline in the consumer confidence index indirectly represents that people will reduce their consumption behavior. Additionally, the price index has indeed been sliding recently. Although retailers warn that tariffs will cause prices to rise, given the current scale of the trade war, a basic tariff of 10% is unlikely to lead to a significant increase in U.S. prices.
On the contrary, the expected reduction in consumption due to weak consumer sentiment may lead retailers to offer more discounts and promotions. Don't forget that although these companies claim to raise prices, their profits have been hitting new highs, leaving plenty of room to lower prices. In the early stages of price stability, we still believe that there is a good chance of interest rate cuts in the medium to long term. The Fed's revision of its interest rate policy is expected to allow for a higher inflation tolerance, giving the Fed greater space to cut rates. Therefore, we believe that the long-term upward trend of Bitcoin remains unchanged.
