Analysis of macro indicators related to the digital currency market

This paper demonstrates the economic significance of digital currency assets represented by Bitcoin through data analysis of macro indicators, thereby revealing the underlying causes of the significant market risk associated with short-term aggregation of liquidity.

Analysis of macro indicators related to the digital currency market


Cryptocurrencies have evolved over more than a decade of development and accumulation from a micro-level trading category to a large macro asset class with independent economic significance. In addition to its own technological changes, its value has evolved due to a combination of macro factors. In this paper, we place the new asset class of digital currencies in the context of the macro market by using economic indicators to present a comprehensive cryptocurrency market that is closely related to the traditional macro economy.

Main Text

When linking crypto-digital currencies to the macro economy, the first question to address is: what indicators represent or can more accurately reflect the ups and downs of the crypto-digital currency market? The answer is bitcoin price! While it may seem obvious, the rationality of choosing bitcoin price as a measure of the crypto-digital currency market needs to be verified on one hand, and on the other hand, it does not necessarily hold true under all circumstances.

Bitcoin and Ether 30-day rolling correlation coefficients

Bitcoin and Ether are the top two digital currency assets in terms of market capitalization, and together they account for more than 60% of the total market capitalization of the crypto-digital currency market, far exceeding the combined market capitalization of other coins. As you can see from Chart 1: Bitcoin and Ether have a 30-day rolling correlation coefficient between 0.5 and 1 for most of the history, while BTC and ETH maintain a high positive correlation. Accordingly, it is reasonable to assume that in macro analysis, Bitcoin data is effective in demonstrating the changes and developments in the crypto-digital currency market. This is a major underlying premise of this analysis using bitcoin data in comparison to various macro indicators.

While the two have remained highly positively correlated for most of their history, this trend has changed since May of this year, when the Bitcoin-Ethernet correlation coefficient began to fall rapidly to below 0.5. This suggests that under the broad asset class of cryptocurrencies, Bitcoin and Ether and even other “altcoins” may evolve different ecological functions in the future [1], and the same set of macro analysis methods may not be applicable to all historical periods, but this will be further tested by future data.

The US dollar index (DXY)

Since the outbreak of the global epidemic in 2020, inflation expectations in the world’s major economies have risen, the Federal Reserve has released water in high profile, the dollar has depreciated, and the question of whether “the dollar’s status as an international storage currency has been shaken” has become a widespread concern. In such an international situation and economic environment, can digital currencies play the “dollar hedge” property? This requires us to compare the data of the digital currency market with the US dollar index (which measures the degree of change of the US dollar against a basket of currencies).

Figure 2 shows the USD index and the 30-day correlation coefficient between btc and the USD index over the last year. From the chart we can clearly see: btc maintained a significant negative correlation with the USD index for most of 2020, which means that capital markets did once use cryptographic digital currencies as a direction for USD hedging.

But going into 2021, such a correlation was broken. The dollar index bottomed at one point and hovered around 90 and showed no momentum for a significant rebound, a true reflection of the concerns that existed in the foreign exchange market about the dollar. During this period, the btc and its 30-day correlation also showed several reversals, oscillating between positive and negative correlations, and all within a weak correlation range of <0.4 in absolute terms. Such instability suggests that: the market has yet to agree on whether bitcoin can be used as a hedge asset for the US dollar in the future, and macroeconomic factors, unexpected events, etc. can affect the historical positioning of this young asset.

Gold Price

2020 will be a year of uncertainty for many investors who believe in gold as a safe-haven asset. The gold price moved well in the early days of the epidemic shock, but after breaking the all-time high of $2,000 per ounce in August 2020, the price of gold has continued to fall to near its recent $1,800 level, which is the opposite of the performance of digital currencies that have soared all the way to repeated all-time highs. In the financial market panic rising, the global major financial institutions have repeatedly stressed the time of risk aversion, gold has lost the favor of safe-haven capital. One of the main reasons behind this is that the strong liquidity support from the Federal Reserve has led to the market having no “risk” to avoid and capital turning to “quality” risk. At this particular time in history, digital currencies were considered to be both risk-averse and liquidity-chasing, and thus stood out in the limelight. In contrast, gold, a relatively conservative asset in terms of “chasing highs”, appears less attractive. btc’s correlation coefficient with gold has also fallen, entering a swing range.

Will the new investment logic of “chasing the highs while hedging” last forever? Its complexity can only be better appreciated after we have a deeper understanding of inflation as an indicator, which will be explored later in the article in conjunction with the real interest rate on 10-year US Treasuries.

Broad U.S. stock index: S&P 500

Individual stock prices cannot be used as a macro indicator of the economy, but the broad index of the most dominant stocks in a market/region can. As an overall measure of the share prices of the top listed companies in the U.S. stock market, the S&P 500 not only reflects the U.S. economy, but is also an important indicator of the health or otherwise of the worldwide economy.

The correlation coefficient between btc and the S&P 500 over the last year in Data Figure 4 shows that the US stock market has maintained a consistent upward trend with the digital currency against the backdrop of the Federal Reserve’s liquidity support for the US dollar capital markets. Although the two are in a weak correlation of <0.4 for most of the time, it does not prevent global risk-averse capital from pursuing both of them.

Despite the uncertainty of future forecasts, the stock market and cryptocurrency market linkage remains a constant theme in the study of digital currency capital markets.

Total U.S. M2 Money Supply and M2 Circulation Velocity

M2 is the simplest measure of the Fed’s liquidity support. Data Figure 5 shows the change in the total money supply M2 as well as the velocity of money circulation (GDP/M2) from the 1980s to the present (Reagan-Greenspan period).

It is clear from the graph that: before the bursting of the Internet bubble in 2000, the rate of M2 delivery rose sharply and reached a new height (slope of the yellow curve); in contrast, the rate of money circulation has been declining over the same period. This means that economic growth (GDP) could never catch up with the pace of money placement. Yet this is small compared to the economic stimulus that followed the 2020 epidemic. The rightmost part of the graph shows that while the money supply surged, the stimulus effect of M2 on the economy showed a precipitous fall.

The impact of the epidemic on the global economy is far more dramatic than we thought, and this kind of consumer economic shock stagnation is unprecedented in recent economic history, and there are real difficulties in keeping the money flow at the same level. However, the economic shock of the epidemic is not the main concern of the economics community, which is really worried that such a deterioration is only a continuation of the trend of the last 30 years. The real problem is the so-called “zombie economy” where the new wealth created does not outweigh the new debt incurred. In such a situation, liquid capital, both fearful and greedy, has to continue to search for the “best” safe-haven assets amidst “exhaustion”. The crypto-digital currency, which is highly sought after under the investment logic of “hedging while chasing high”, is of course hardly a stable and continuous “optimal solution” for investors, and it is significant to monitor the M2 supply and M2 circulation speed.

Real rate of 10-year US debt and inflation expectations

If an increase in M2 money supply could support the economy out of the epidemic downturn without any negative effects, then the Fed’s liquidity support would be uncontroversial. However, this is not the case, and the continued acceleration of monetary spending has attracted a lot of debate among economists. The reason for this is that central banks in developed economies such as the US have to monitor current inflation and make expectations for the future through consumer data (CPI, PCE, and other common economic indicators) at all times under this policy. This monitoring is complicated because we do not know for sure “whether there is a real risk of uncontrollable inflation” and “whether the current measures of inflation, whether they exist on paper or not, are theoretically flawed in the sense of guiding economic activity. For the capital markets, future inflation expectations are the most important macroeconomic indicator, which is most simply reflected in Treasury yields and real Treasury yields. Therefore, when we study the macro indicators related to the digital currency market, we also need to include Treasury yields and real Treasury yields in our examination.

The U.S. bond yield is the nominal capital return for a fixed future maturity as derived from the inverse of the bond market price, which can be simply understood as the immediate interest rate on that day, while the real Treasury yield is the real interest rate excluding inflation. The difference between the two at the same maturity is the market’s best response to inflation expectations at a given time in the future. The “decade” is a key cycle length in the economic activity cycle and is the main cycle in the Treasury bond market, so we chose the 10-year U.S. Treasury bond as the subject of our analysis. The chart below shows the yield trend of the 10-year Treasury bond, and an analysis of the chart shows that

(a) 10-year Treasury yields recovered slowly after last year’s epidemic shock, but are far from pre-epidemic levels.

The real yield on the 10-year bond has been negative since the epidemic, and the overall capital spillover from the bond market and the shift of capital to chase risky assets for risk aversion purposes is logically justified; the “chasing the high” approach.

The width between the two yield curves, that is, the difference, is the market’s average inflation expectations for the next 10 years.

This value has long exceeded the Fed’s long-term inflation target of 2%.

Inflation, obtained by monitoring the current price index, is a common tool, but this operation tends to be lagged.

Future inflation expectations, as reflected by market-determined interest rate differentials, on the other hand, are more reflective of market fears about inflation.

The duty to effectively control inflation means that if the U.S. economy overheats and inflation rises too fast in 2021-2022, the Fed will certainly consider raising the benchmark interest rate and tightening monetary policy to control the growth rate of monetary investment, so that the logic of “chasing high and avoiding risk” will fail.

However, in the context of low velocity of money circulation (GDP stimulus effect) and the prevalence of “zombie economy”, the sudden reduction of liquidity support is also unbearable for the current capital markets.

The Federal Reserve will have a dilemma in releasing liquidity, and capital will continue to seek diversified “quality exposures”, which means that a unified study of cryptocurrency markets and macroeconomics is necessary.

Total TEDA Token USDT Issuance

In the world of cryptocurrency assets there is a concept that is similar in logic to the total M2 USD money supply, but not identical, and that is the total amount of digital currency tokens that are “relatively stable” in value that are placed on the market (USDT as a USD “stable currency”). The concept of USD “stablecoin” requires extra care, as USDT is essentially a business and a commercial credit guarantee of its issuer, TEDA, which is fundamentally different from a sovereign currency). The data graph below shows the total number of USDT issues over the last less than 2 years, and it is clear from the graph that the total number of issues has been rising. The analysis of this indicator requires the clarification of a number of prerequisite assumptions, the main ones that deserve our attention are the following.

The increase in USDT issuance can be driven by the rapid growth of the digital currency market (post-emergence) or in turn stimulate the rise in market valuation (pre-emergence) behavior

Many scholars have written about the role of the TEDA token in the rapid price changes in Bitcoin since its emergence, and even in some critical moments

The volume of digital assets traded in the market by other “dollar stable tokens” and the dollar itself cannot be ignored

The so-called “stable” value of the currency in relation to the US dollar is economically “weakly stable” rather than sovereign legally “strongly stable”

The overall controversial and highly intuitive metric implies great research value and is an indispensable “macro” metric for the digital currency asset market.

In Summary

Cryptocurrencies have in fact formed a new financial asset class, and the fundamentals of this new asset class need to be extensively linked to traditional economic macro indicators in order to help us better understand the broader context in which the cryptocurrency market is formed and to make reasonable predictions about its future trends. This paper presents an objective demonstration of the economic significance of digital currency assets represented by Bitcoin through data analysis of macro indicators, neither blindly exaggerating nor overly disparaging, and reveals to readers the underlying causes of the huge market risks associated with the short-term aggregation of liquidity.

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