In this sentiment-driven market, investors need to maintain psychological agility and strategic flexibility. The biggest challenge currently facing the market is the lack of buying support. Bitcoin's next upward cycle may benefit from institutional capital that doesn't rely on leverage. In fact, perhaps we need a dip like this to unleash Bitcoin's "supercycle." If we continue to fixate on the four-year cycle framework, the market may fall into a psychological burden, believing that 2026 will be a year of decline. It may be difficult to see positive signs in the short term because the global economy is currently facing some very serious problems, such as a liquidity crisis, geopolitical risks, and Trump himself. Unexpected events like black swan events could act as catalysts for Bitcoin's rise. One possibility is a sovereign nation suddenly announcing a purchase of Bitcoin, particularly major developed countries within the OECD. Another factor that could drive up Bitcoin's price is a solution to the quantum computing problem. Future institutional decisions could directly influence user choices. Why is Bitcoin falling? Should investors worry? Anthony: Many investors are very worried about the recent continuous decline in Bitcoin's price. What's your opinion? What do you think is happening behind the scenes?
Jeff:
I recall that about two or three weeks ago, we discussed the need to readjust our expectations for Bitcoin's price movement, especially after the massive liquidation event on October 10th. This event not only impacted market sentiment but also damaged retail investor confidence in Bitcoin. Furthermore, it affected long-term views on the institutional crypto market, which may not be functioning as well as expected.
Currently, we still face many unresolved issues. For example, there are rumors that some market makers may face bankruptcy, which could further dampen market risk appetite. This week's market performance further highlights a core characteristic of cryptocurrencies: they are typical trending assets. Trending assets are characterized by prices that tend to fluctuate wildly with changes in market sentiment, rather than reflecting their value through buying low and selling high, as traditional value assets do.
Jeff:
Of course, the Harvard endowment fund is indeed a very interesting case study, with its investment strategy undergoing several adjustments during the tenures of different chief investment officers. When I worked at the Harvard endowment fund, the fund's management model was very flexible, similar to that of a hedge fund. The internal team directly managed the balance sheet, engaged in high-frequency risk trading, and adopted an SMA (Single Managed Account) structure to improve capital efficiency. However, with the arrival of NARV, the Harvard endowment fund's strategy gradually moved towards a more traditional Yale model, that is, allocating funds to external fund managers to bear the risk, while internal direct risk exposure gradually decreased.
Regarding their current investment strategy, I think their investment exposure is very tactical and specific. For example, if Bitcoin's core returns align with their asset allocation goals, then including it in the portfolio is perfectly reasonable.
Furthermore, they might exploit the price difference between spot and futures markets to engage in relative value trading. This strategy has historically been widely adopted by institutional investors such as pension funds, particularly in balance sheet management. I don't know the exact details of Harvard's current operations, but in the cryptocurrency market, there are indeed sometimes low-risk or even risk-free arbitrage opportunities. For example, by hedging Bitcoin risk in different directions, investors can obtain stable returns. Harvard is actually an early investor in the cryptocurrency space. They have been in this market for nearly 10 years through venture capital funds, so it's fair to say they are very experienced in this area and adept at generating alpha through various means. Nevertheless, seeing Bitcoin become the largest holding of Harvard's endowment fund is still surprising. Whether this is due to a directional long strategy or a market-neutral strategy, it indicates that the Bitcoin market is large enough and deep enough to accommodate the main investment of a $55 billion endowment fund. This would have been unimaginable five years ago.
Has the option changed the market dynamics of Bitcoin?
Anthony:
I've noticed that the types of participants in the Bitcoin market are becoming increasingly diverse, including retail investors, as well as institutional investors such as hedge funds, professional traders, and asset management companies. Companies like Blackstone enter the market through passive ETF products, while endowment funds may operate using balance sheets, and the finance departments of some countries and corporations are also participating in the market through ETFs and other means.
Suppose you have a one-dollar investment strategy, that dollar may not all flow into the spot market. If someone buys a Bitcoin ETF, theoretically the ETF's funds will eventually flow into the spot market, but perhaps only 99.9% or some other percentage will actually enter the spot market.
I'd like to know, has the emergence of options, to some extent, diverted the capital and energy that originally flowed into the spot market? Jeff: There are indeed more choices in the market now, and more choices mean more complex risk stratification, maturity stratification, and asset-liability stratification. These stratifications have actually changed the market's direct exposure to Bitcoin spot. In other words, investors can indirectly hold Bitcoin through more complex financial instruments without having to directly purchase spot. Before these complex financial products, our insights into the crypto market relied primarily on exchange trading volumes, derivatives market dynamics, and on-chain data analysis. These were the main decision-making bases at the time. However, now there are new decision-making nodes in the market, especially large institutional participants. They invest in Bitcoin-related assets through various credit instruments, and the price fluctuations and coupon yields of these instruments directly affect the demand for Bitcoin. For example, companies like MicroStrategy are using these tools to accumulate Bitcoin, something that was impossible in the past. While current market trading volumes aren't particularly high, I believe the impact of these complex products is even more significant than the trading volume itself. For instance, last week news broke that an investor had purchased nearly $900 million worth of Bitcoin in a single transaction, becoming one of the biggest news stories in the market recently. This illustrates that physical buying (i.e., direct purchase of spot Bitcoin) remains a core driver of the market. The market is indeed different from the past, but ultimately, market dynamics still depend on investors who want to gain exposure to Bitcoin and take on the risks associated with it. This demand must be met somehow, and this usually means someone is buying actual Bitcoin on the other end. What signals does Jeff look for to judge market optimism?
Anthony:
In the current market downturn and widespread pessimism, what areas do you see as areas where we can see signs of optimism? We've noticed some large investors starting to buy Bitcoin between $89,000 and $90,000. Despite the constant bad news and widespread anxiety, can you point to some market signals that give you hope?
Jeff:
One signal that gives me optimism is Bitcoin's resilience compared to other risk assets during intraday price fluctuations. Even when the stock market crashes due to the so-called "AI bubble," Bitcoin doesn't seem entirely affected. For example, if Palantir's stock price plummets by 40%, I don't think Bitcoin will drop by 40% in the same period. This independence will attract institutional investors once the correlation between Bitcoin and other assets is broken, as Bitcoin can offer a different performance in their portfolios.
Anthony:
For institutional investors, a key reason for choosing Bitcoin is its need to differentiate itself from traditional assets. As long as Bitcoin can exhibit this "orthogonality" (i.e., low correlation with other assets), it has the potential to be included in more portfolios. While Bitcoin's current gains may not be as significant as gold's, and its volatility not as pronounced as Nvidia's, these differences are precisely Bitcoin's unique strengths. In the long term, this characteristic means that Bitcoin's demand and potential will further increase. I think this is a very positive aspect. Furthermore, Bitcoin's price volatility is another characteristic worth noting. For example, Bitcoin could fall by $35,000 in 40 days, but it could also rise by $35,000 in 20 days. This rapid shift in sentiment can be a catalyst for the market, especially when investors view it as a unique asset exposure. Has the four-year cycle officially expired? Anthony:
Furthermore, the volatility of Bitcoin's price is a characteristic worth noting. For example, Bitcoin could fall by $35,000 in 40 days, but it could also rise by $35,000 in 20 days. Especially when investors view it as a unique asset exposure, this rapid shift in sentiment can act as a catalyst for the market.
Jeff:
I believe that, logically and fundamentally, the four-year cycle theory is indeed no longer applicable. This theory was initially based on Bitcoin's "halving" event, but today, the impact of halvings on new market demand has greatly diminished. The market is now more driven by the capital needs of institutional investors, so a new cycle more aligned with institutional investment behavior should emerge.
Anthony:
I believe that, logically and fundamentally, the four-year cycle theory is no longer applicable. This theory was initially based on Bitcoin's "halving" event, but today, the impact of halvings on new market demand has greatly diminished. The market is now more driven by the capital needs of institutional investors, so a new cycle more aligned with institutional investment behavior should emerge.
Jeff:
Actually, I'm somewhat looking forward to this. This situation could be an opportunity for companies like Bitwise to differentiate themselves from traditional financial giants like BlackRock. We know that cryptocurrencies are active technological assets that require professional services to manage. We might adopt different strategies to cater to clients with varying risk tolerance. I'm reminded of the block size debate in 2017. At that time, Coinbase decided not to support Bitcoin Cash, while Kraken chose to. As a result, many users switched from Coinbase to Kraken, illustrating how institutional decisions can directly influence user choices.
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