How Bitcoin is impacted by the macro
August 16, 2023
Hello everyone! Today is the 16th of August 2023. We are writing this update to convey our understanding of where we are within the context of the Bitcoin and broader macro cycle, and how these things will impact the Trend signal.
To put things in context, if you look at the signal history we had 2 false signals generated over the period of 6 years. One was at the end of the previous cycle when the FTX debacle happened and we managed to escape timely with a scratch of -7%, a result we are very satisfied with. Another false signal came through in a period between September 2019 to March 2020. This is a part of the cycle, usually associated with increased uncertainty and volatility, which comes just before the beginning of a new bull run. This neatly coincides with heightened uncertainty across the broader macro space. Yes, Bitcoin doesn’t exist in a vacuum, and over the years it has shown to get more and more susceptible and sensitive to the macro conditions, at times building and breaking strong correlations to different asset classes, US dollar, and equities mainly.
To gauge this sensitivity we employ our proprietary Cross-asset class analysis, where we study fundamental dependencies and rolling correlations between the major asset classes like global equities, fiat alternatives, rates, currencies, credit, and commodities to build a comprehensive picture of the current environment and how each individual asset class relates to this environment. This helps us to pick the highest probability trades and understand the magnitude of the potential moves. Crypto is a part of this system. With our bullish view on rates and therefore the dollar and Bitcoin’s negative 0.83 correlation to the dollar it is hard to be overly bullish on BTC in the short term even though the signal is still positive. Little things like that help to build up the entire picture. Exactly the cross-asset class analysis indicates to us that we are in a phase of heightened uncertainty when we are not gonna get any lasting moves in any direction, and the probability to receive false signals is increased. We are acutely aware of these conditions and closely monitor the potential changes in the signal.
To sum things up, we are not overly bullish on Bitcoin in the intermediate term (1-month to 3-month horizon). But if history is any indication this period will pass and we shall get a new major cyclical upswing in Bitcoin in 2024.
The biggest risk that we see for Bitcoin actually sits outside of the crypto ecosystem, and it is the potential of the discontinuous rise of yield in the US in the long end, caused by new issuance hitting the market and possibly reaccelerating inflation in September.
Take a look at the picture below (all credits to Raoul Pal at RV), it highlights the rise in interest payments the government will have to incur from 2023 onwards. The question is how it is gonna be financed, with an infinite expansion of the balance sheet or some sort of financial repression(forcing savings institutions and banks to hold government bonds)? Probably a mix of both. But this dynamic defines liquidity and the direction of the asset markets. Crypto included. If we do get the discontinuous rise in yields this will be detrimental for all of the asset classes until the liquidity spigots are turned back on.
We are aware of the potential risks. Our job is to prepare for that cyclical upswing and to minimize losses before it comes. Stay tuned!