revealed the macro analysis framework during the Crypto industry’s development, the correlation between the market and macroeconomics has become increasingly significant, and macro analysis has become an essential part of market analysis. In this article, the guests shared their frameworks and methodologies for analyzing macroeconomics, as well as the underlying logic.
HighFreedom explained that macro analysis for crypto consists of two parts: non-crypto native macro and crypto native macro, with a focus on BTC on-chain data analysis. For non-crypto native macro, he uses a three-tier framework. The first tier includes various data such as employment, GDP, inflation, and PCE. The second tier involves summarizing and categorizing the data into economic well-being and inflation levels, which are the ultimate goals of monetary and fiscal policies. The third tier focuses on the specific components and future expectations of USD liquidity, including bank reserves, the Fed’s balance sheet, Treasury balances, and overnight repurchase agreement account balances. By analyzing these factors and quarterly refinancing announcements, one can predict the future trends of USD liquidity.
Albert added that besides the impact of Fed and Treasury policies, microeconomic factors like bank deposits should also be considered. For example, during a high-interest-rate cycle, people tend to deposit their funds in banks to earn interest, which can affect market liquidity. He mentioned historical instances where bank deposit growth slowed significantly after the 80s and 90s banking crises and after the 2023 SVB incident, where bank deposits decreased while the stock market and other asset markets began to recover. He also highlighted the impact of international liquidity, such as the Japanese banks’ yen-carry trades, on the market.
Vivienna shared her analysis on the impact of US liquidity on cryptocurrency prices. She divided the influencing factors into three categories: observable indices (Federal funds rate, bond yields, USD index, gold price), liquidity indicators (Fed’s balance sheet, reverse repurchase operations, Treasury accounts), and sentiment indicators (dot plot, Fed officials’ speeches, labor market and inflation data). She emphasized that while these factors have short-term effects on market expectations and sentiment, traders should focus on changes in expectations rather than just the data itself.
Regarding how these macro frameworks are applied to the crypto market and how they guide trading strategies, HighFreedom mentioned three ways to make profits: catching the market trend, profiting from volatility through quantitative trading, and earning money from liquidity by lending to traders in a bull market. Personally, he prefers to hold spot positions during a bull market, especially in mainstream cryptocurrencies like Bitcoin. He also utilizes some of his funds for leveraged long positions but avoids frequent long-short operations. He believes identifying market highs and lows is crucial, and it requires considering various factors such as mining costs, market sentiment, lending rates, and funding rates.
Overall, the macro factors, particularly liquidity and penetration rate, play a significant role in influencing the cryptocurrency market. HighFreedom focuses on catching the market trend during a bull market, while also considering various information sources to identify market highs and lows.This indicates that when liquidity reaches its peak, risk assets may need to prepare for an exit. Therefore, I will closely monitor liquidity indicators to determine whether the market is approaching a top or bottom.
At the same time, I believe in information diversification, which means forming comprehensive market judgments by collecting information from different perspectives. This approach helps us accurately identify market highs and lows, making more rational trading decisions and minimizing the possibility of operational errors. I will also adjust my risk management strategy according to market conditions to ensure the protection of my investments during market fluctuations.
Vivienna:
I recommended a book called “Principles of Professional Speculation” on Twitter. The author, Spolander, proposed two fundamental principles of market analysis and prediction: one is that market trends are the result of the operation of fundamental economic forces, which are influenced by political systems and policy activities; the other is that the psychological state of market participants determines the way and timing of price trends.
Macro analysis should focus on these two points. Firstly, we need to understand the basic principles of politics and economics, such as economic indicators, production-consumption cycles, investment-saving behavior, and the development path of technological innovation. Secondly, predicting the psychological state of market participants has stronger guiding significance for trading. Macro analysis is often questioned because many people focus too much on economic and financial data, ignoring expected changes. Successful trading not only requires analyzing the current situation behind the data but also paying attention to how expectations change and how market games are played.
Soros once pointed out that economic history is based on false lies, not truths. The way to make big money is to analyze false trends, operate in line with the trend, and exit before being exposed. This reflects the above principles because to distinguish false trends, you must first know what is correct. For example, if the government adopts a high-interest-rate policy during an economic recession or tries to stimulate the economy by adjusting interest rates through monetary policy, if you do not understand the transmission mechanism of these policies, you cannot judge their consequences or exit before most participants discover the problem.
Albert:
Regarding how the macro analysis framework affects the cryptocurrency market and our trading strategy, let me explain a few points below:
First, starting from 2020, we have discussed a long-standing theory called the liquidity chain theory. According to risk analysis, we rank different assets such as commodities, foreign exchange, stocks, etc. based on a chain. Cash is at the top of the chain, as the foundation of all assets, with extremely low risk except for inflation. If even cash is at risk, it means that the global market may face a reset.
The second layer of the liquidity chain is bonds, especially government bonds, which are considered low-risk assets. The third layer is corporate bonds and stocks, as they offer relatively higher returns. The fourth layer is commodities, with higher volatility and risk. The last layer is cryptocurrencies, as they are at the end of the liquidity chain, with the highest volatility and risk.
This theory also explains the underlying reasons for the phenomenon mentioned by Highfreedom earlier that “the high points of Bitcoin prices are related to the high points of the Nasdaq index and US dollar liquidity.”
When liquidity is released, it first affects the foreign exchange market, then the bond market, followed by the stock market, commodity market, and finally the cryptocurrency market. Conversely, when liquidity tightens, the process of withdrawal is reversed. This flow order of liquidity has a significant impact on the market.
As traders, we use this framework to guide our trading. For example, when we see liquidity starting to tighten or be released, we can predict the market’s reaction and adjust our trading strategies accordingly. We closely monitor interbank interest rates and bond futures as these are the market’s first reactions to policy changes. Then, we analyze the options market because option prices reflect the market’s expectations for future volatility.
Our trading strategy is mainly based on these macro expectations. For example, during an interest rate hike cycle, market sentiment tends to be bearish, and we allocate put options when volatility is low. At the same time, we adjust our options portfolio based on market sentiment and expectations to profit from volatility regression.
Our strategy relies on volatility regression, especially near-term volatility. Far-term volatility may remain high for a period and not immediately regress. Therefore, we are usually buyers in the far term, obtaining value through intertemporal allocation. Our portfolio strategy is to profit from the difference between near-term and far-term options.
Zheng@LUCIDA:
The next question will be relatively easier, and we indirectly mentioned it in our previous conversation, which is the position of Bitcoin in traditional assets. I remember that in 2019, especially in the first half of the year, the market generally considered Bitcoin as a safe-haven asset. At that time, due to some geopolitical crises, the price of gold rose, and Bitcoin followed suit. The market’s recognition of this view was increasing.
However, with the bull market cycle from 2020 to 2021 and the situation in 2022, the public gradually accepted that Bitcoin is a riskier asset than traditional risk assets. I want to know if everyone agrees with this positioning or if there are other descriptions of Bitcoin’s position in major assets.
HighFreedom:
I think this description is quite accurate. I believe that Bitcoin is undoubtedly a riskier asset in the medium to short term. However, in the long run, I am confident that Bitcoin can develop into a safe-haven asset. Currently, we are in the process of Bitcoin growing into a safe-haven asset. I believe that safe-haven assets need to have several basic elements, and we can discuss whether these are necessary conditions:
The first is a large market size: the market size of the asset needs to be large enough for large amounts of capital to enter and exit freely.
The second is a reduction in volatility: although Bitcoin has historically experienced high volatility, it has now significantly decreased and is close to or sometimes even lower than the volatility of gold.
The third is rationality and stability of market participants: as market participants gradually shift from insiders to more traditional and rational financial institutions, the market may become more stable.
When these conditions are met, Bitcoin may become a mature safe-haven asset with a larger market size and lower volatility, similar to gold. At that time, even major events would only have a slight impact on the price.
Vivienna:
I think the comparison logic between Bitcoin and gold, calling Bitcoin “digital gold,” is widely recognized. Bitcoin’s total supply is fixed, similar to the scarcity of gold, and it can serve as a store of value and a means of payment, which is highly consistent with the characteristics of gold.
However, the pricing of gold is a complex issue. During times of war or other periods of turmoil, the safe-haven nature of gold becomes particularly evident. If the basic liquidity of the market is not tight, but there are significant geopolitical factors, Bitcoin may follow the trend of gold because the main factor affecting the price of gold is safe-haven sentiment. Accordingly, the price of Bitcoin will also be influenced by safe-haven sentiment.
However, if the basic liquidity of the market itself is insufficient, such as when the global or US economy enters a recessionary cycle or there are expectations of a recession, even if safe-haven sentiment is high, it cannot drive trading volume. This explains why in some intense geopolitical conflicts, other markets do not have significant reactions. In this case, it is the basic liquidity that determines the price bottom, and Bitcoin is closer to a risky asset.
Therefore, the correlation between the price of gold and the price of Bitcoin depends mainly on the market’s basic liquidity at that time and the market’s perception of Bitcoin’s attributes. Most of the time, the price of Bitcoin is highly correlated with the US stock market. It leads the way in economic downturns, investment contraction, and deleveraging processes, and also leads in economic recovery and investment return with leverage, with a greater acceleration.
Gold holdings in global asset management companies are usually controlled within 5% because the factors influencing the price of gold are very uncertain. Although gold has practical applications, it is more influenced by speculation and emotions and lacks fundamental analysis. This makes it difficult to convince limited partners (LP) why they should invest in gold, and can only be based on predictions of future economic recessions or risks, which are subjective and difficult to be persuasive.
Bitcoin faces the same problem and struggles to convince capital companies and LPs to allocate funds to this asset. Although gold is considered a safe-haven asset, its ability to hedge against inflation is mainly reflected over the long term. Bitcoin may be the same, and its position may be very high in the future, especially with the increasing difficulty of Bitcoin mining.
If more traditional financial asset management companies enter the Bitcoin investment field, the investment proportion of Bitcoin may become closer to gold.
Albert:
From a macro perspective, both gold and Bitcoin have multiple attributes. They can be both risk assets and safe-haven assets. This phenomenon may seem contradictory at first glance, but it has its inherent logic.
Firstly, both gold and Bitcoin are safe havens for funds during times of crisis. During wars or other turbulent periods, asset transfers are restricted, and liquidity seeks safe havens. Investors tend to transfer funds to assets that are easy to cross borders, such as gold and Bitcoin. This leads to these assets gaining value during crisis periods.However, during stable market periods, gold and Bitcoin have different properties. Due to its high volatility, Bitcoin is more of a risk asset and its price fluctuates with the stock market. One reason for this is the availability of leverage tools in the Bitcoin market and the large number of market participants, leading to significant price fluctuations.
In stable environments, investors tend to seek stable investment portfolios and avoid significant price fluctuations. Therefore, they may be more inclined to allocate some traditional assets such as gold and other commodities. Gold, due to its long history and stable value, is usually kept within 5% of the investment portfolio.
In addition, the prices of gold and Bitcoin are also influenced by market expectations. When liquidity is abundant, investors may seek higher-yielding assets, while during liquidity tightening, they may revert to traditional safe-haven assets.
Finally, the status of Bitcoin and gold as safe-haven assets also depends on the market environment and the phase of the macroeconomic cycle. In certain situations, they may exhibit safe-haven characteristics, while in other situations, they may be perceived more as risk assets.
Macroscopic analysis: what are the tools?
Zheng@LUCIDA:
Next, let’s discuss a question: what data sources do you usually rely on when analyzing the macroeconomy? Do you collect data yourself or use any non-traditional analysis tools? Can you share any exclusive sources of information?
HighFreedom:
I wrote some code on tradingview to create a dashboard for continuous monitoring and analyzing macro liquidity. These tools are no different from the data provided by the Federal Reserve and the Treasury Department’s official websites, but I have integrated them into a single interface for easy monitoring. In addition, I follow some analysts on Twitter, especially a ** blogger who aggregates interesting data, such as lending rates from different exchanges. This data reflects the trading trends of large and small investors and the order of their actions. I find this data very valuable, but I have not successfully applied his tools yet.
I have also been looking for data on US bonds, especially the daily net issuance of short-term, medium-term, and long-term bonds (net issuance refers to the difference between the newly issued bonds and the bonds that mature on the same day). This data is crucial for understanding and judging the market liquidity in the current and upcoming period. Currently, I can only manually download the data from the US Treasury Department’s website and process it myself. If anyone knows better data sources, please recommend them or get in touch.
Albert:
I would like to add some macroeconomic data sources that we focus on. As I mainly focus on risk commodities, the data services I use include SpotgammaMenthorQ, which provides comprehensive data on US stocks, bond markets, and other commodity options.
In addition, for the US stock market, there are services like GR, which provide real-time data at relatively low prices. For more in-depth data, such as gold or interbank market data, it may be necessary to rely on industry insiders.
For the cryptocurrency market, the recommended data source is Amber DataDerivative, which provides comprehensive options data and has obvious advantages. In addition, this service provider offers real-time data from exchanges such as CME.
We also need to pay attention to the data from certain exchanges, especially those with a large proportion of institutional trading volume, such as Deribit, where 80% of the volume comes from institutions and 20% from professional individual investors. Such data can reflect market expectations at the institutional level and have a significant impact on the market.
In addition, exchanges like Bitfinex can be considered as the interbank market of the cryptocurrency market, and their short-term lending rates can reflect the risk-free rate of the market, which is important for calculating the risk premium of the cryptocurrency market.
Compliant exchanges, such as Coinbase, and their data on large-scale transactions are also important, especially dark pool trading data, which may have an impact on the market.
Overall, although we can obtain a large amount of market data, the final trading decisions still rely on our own risk management capabilities. Our goal is to avoid losses or make small profits in most cases, and make big profits in a few cases.
Review and outlook for this cycle
Zheng@LUCIDA:
We now turn to the last question, the outlook for the future market.
I will share my viewpoint first: The market generally expects that the Fed’s rate cuts in the second half of this year or next year will bring significant liquidity, coupled with positive factors such as Bitcoin halving, many people expect to replicate the bull market of 2021. However, I hold a very pessimistic view on this widely optimistic expectation because historically, highly consistent market expectations often come with significant potential risks.
In particular, regarding US mutual funds and other institutional investors, although they belong to long-term holding institutions, they also make investment decisions based on market conditions and do not blindly “chase high”.
HighFreedom:
My view is very similar. The current market’s primary uptrend started in November last year, especially after the spot ETF trading in January, the market experienced significant volatility. The liquidity and penetration rate have been increasing, but mainly driven by retail investors, and true institutional investors have not entered on a large scale yet. For example, in the capital inflows of spot ETFs, 80% to 85% came from retail investors. The liquidity and penetration rate have been stagnant in the second quarter. My outlook for the third and fourth quarters is that I hope the liquidity can remain stable and the penetration rate can increase due to further participation of institutional investors.
I believe that rate hikes or rate cuts do not immediately change liquidity, but rather change market expectations for future liquidity. My question is whether we can still have a loose fiscal and monetary policy environment like in 2021, and currently, this possibility seems unlikely. Therefore, I have a cautious attitude towards the market’s future performance, hoping to avoid overly optimistic expectations.
There may not be significant changes in the market in the short term, and the liquidity expectation may include 4 to 5 rate cuts within the next 15 months, which provides a stable expectation for the market. However, the real release of liquidity will be slow, and there is unlikely to be a large-scale rapid change. Unless there is a severe economic recession or crisis, it is unlikely to see another loose fiscal and monetary policy environment.
So if there is no severe economic recession, then it is highly probable that this rate cut will be a so-called “asymmetric rate cut”. Previous rate hikes and cuts were symmetric, for example, it took about a year to raise the federal benchmark interest rate from a low level to a high level, and it would take a similar time to lower it back to a low level. The aggressive rate hikes started from 0-0.25 in March 2022 to 55.25 in May 2023, taking a little over a year, but this rate cut may take a non-symmetric route, with a slow and gradual process.
Vivienna:
My conclusion is relatively simple and similar to everyone’s views. From July/August to the end of the year, the market may face less optimistic liquidity conditions. Even if there are rate cuts, there may only be one, which provides positive expectations for the market but does not fundamentally change the current situation.
The current economy has not entered a recession, and the stock market may continue to rise. People’s lives seem to be relatively unaffected, and deposits and dividends still contribute to household savings and promote consumption. However, if inflation continues to rise, it may trigger trading expectations for stagflation cycles. If high-interest rates continue next year and even require further rate hikes in certain cases, while the Treasury Department does not relax its policies, this may lead to tighter liquidity next year. This is definitely not good news for markets that rely on liquidity, such as Bitcoin.
As for the desire for large-scale entry of institutional investors, I think this is more of an expectation than a reality. In the current situation of poor basic liquidity, inadequate understanding of cryptocurrencies in the market, and high volatility, institutional investors are unlikely to enter on a large scale or establish positions. This expectation may be too idealistic, and the actual situation may not be as we wish.
Albert:
Currently, the market’s short-term expectations are leaning towards bearishness, especially for Bitcoin. Although there may be increased volatility due to factors such as options expiration in July, in the long run, the asset allocation cycle may drive prices up. However, for the market to rise, it may rely on two factors: the massive allocation of institutional investors and further improvement in investor sentiment. But this sentiment-driven rise may not be healthy, as high funding costs and high volatility are difficult to sustain in the long term.
My view is that the market’s rise will be a slow process because the participation of market participants is gradual. The use of derivatives and leverage is unlikely to drive the market in the short term. In this case, the operations of market makers may become an important factor affecting the market price trend. Macro factors may only be one factor influencing market maker hedging behavior, rather than directly affecting prices. This may make the market appear more irregular and increase the difficulty of executing strategies such as CTA.
Overall, there may not be a large-scale crash or rapid rise in the market in the short term, but rather a slow and prolonged process. Liquidity will not experience large ups and downs unless there is a severe economic recession. Investors should remain cautious and pay attention to the allocation trends of institutional investors and changes in market sentiment.
