The potential need to prepare for an exit from risky assets when liquidity peaks underscores the importance of monitoring liquidity indicators closely. This allows for assessing whether the market is nearing its peak or bottom.
Furthermore, the concept of information orthogonality, as advocated in the book “Professional Speculation Principles” by Spolander, outlines two fundamental principles for market analysis and forecasting. Firstly, market trends result from fundamental economic forces influenced by political systems and policy activities. Secondly, the psychological state of market participants determines the manner and timing of price movements.
Macroscopic analysis should focus on these aspects. Understanding basic principles of politics and economics such as economic indicators, production-consumption cycles, investment-savings behavior, and paths of technological innovation is crucial. Additionally, forecasting the psychological state of market participants provides stronger guidance for trading decisions.
Successful trading necessitates not only analyzing current data but also anticipating changes in expectations and market dynamics. This approach minimizes the likelihood of operational errors and aligns with Soros’ view that economic history is based on erroneous myths rather than truths.
Regarding the impact of macroeconomic frameworks on the cryptocurrency market and our trading strategies, several points can be highlighted. Since 2020, we have discussed the liquidity chain theory, which categorizes different assets such as commodities, foreign exchange, and stocks in a hierarchy. Cash sits at the top with minimal risk, while cryptocurrencies, at the bottom, exhibit the highest volatility and risk.
Understanding this liquidity chain guides our trading strategies. For instance, during periods of liquidity tightening or easing, we predict market reactions and adjust our strategies accordingly. Monitoring interbank rates and bond futures helps gauge initial market responses to policy changes, while analyzing options markets reflects market expectations of future volatility.
Our strategies primarily hinge on volatility regression, particularly in near-term volatility. Long-term volatility may remain elevated, necessitating a buyer’s stance in the longer-term, cross-period configuration to capture value differentials between near and far options.
Lastly, the discussion on Bitcoin’s position among major asset classes has evolved. Historically viewed as a risk asset, Bitcoin’s potential to evolve into a safe haven asset is being realized amidst changing market sentiments. Attributes such as market size, volatility reduction, and participant rationality are critical for Bitcoin’s maturation as a hedge asset akin to gold.
The correlation between gold and Bitcoin prices depends largely on prevailing market liquidity and perceptions of Bitcoin’s attributes. While both are seen as safe havens during crises, their appeal can vary based on economic conditions and investor sentiment.As a professional translator, I translate the news article into English:
However, during periods of market stability, gold and Bitcoin have different characteristics. Due to its high volatility, Bitcoin is seen more as a risky asset and its price fluctuations are related to the stock market. This is partly due to the availability of leverage tools in the Bitcoin market and the large number of market participants, which leads to significant price fluctuations.
In stable environments, investors tend to pursue conservative investment portfolios and avoid large price fluctuations in assets. Therefore, they may prefer 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 an investment portfolio.
Furthermore, the prices of gold and Bitcoin are also influenced by market expectations. When liquidity is abundant, investors may seek higher-yielding assets, but 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 specific situations, they may exhibit safe-haven characteristics, while in other situations, they may be seen more as risky assets.
4.
What are the key tools for macro analysis?
Zheng@LUCIDA:
Next, let’s discuss the tools and data sources you usually rely on for macroeconomic analysis. Do you collect data on your own or use any non-traditional analysis tools? Can you share any exclusive information sources?
HighFreedom:
I have written some code on TradingView to create a dashboard for continuous monitoring and analysis of 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. Additionally, I follow some analysts on Twitter, especially one blogger who aggregates interesting data such as lending rates from different exchanges. These data reflect the trading trends of large and small investors and the order of their actions. I find these data very valuable, but I haven’t successfully applied his tools yet.
I have also been looking for data on US Treasury bonds, especially the daily net issuance of short-term, medium-term, and long-term bonds (net issuance refers to the difference between the amount of newly issued bonds and the amount of bonds that mature on the same day). These data are crucial for understanding and predicting market liquidity in the short and medium term. Currently, I can only manually download the data from the US Treasury’s website and process it myself. If anyone knows better data sources, please recommend or contact me.
Albert:
I would like to add some macroeconomic data sources that we pay attention to. Since I mainly focus on commodity risk, the data services I use include Spotgamma, MenthorQ, which provide comprehensive data on US stocks, bond markets, and other commodity options.
In addition, for the US stock market, there are services like GR that provide real-time data at relatively low prices. For more in-depth data, such as gold or interbank market data, it may require reliance on industry-specific resources.
For the cryptocurrency market, a recommended data source is Amber Data Derivative, which provides comprehensive options data and real-time data from exchanges such as CME.
We also need to pay attention to data from exchanges, especially those with a high proportion of institutional trading volume, such as Deribit, where 80% of the trading volume comes from institutions and 20% from professional individual investors. Such data can reflect the expectations of the market at the institutional level and have a significant impact on the market.
Furthermore, exchanges like Bitfinex can be seen as the interbank market of the cryptocurrency market, and their short-term lending rates can reflect the risk-free rates of the market, which is crucial for calculating the risk premium in the cryptocurrency market.
Data from compliant exchanges, such as Coinbase and their data on large-scale transactions, especially dark pool trading data, can also be important and may have an impact on the market.
Overall, although we have access to a large amount of market data, the final trading decisions still depend on our own risk management capabilities. Our goal is to avoid losses or make small profits in most cases and achieve large profits in a few cases.
5.
Review and outlook for this cycle
Zheng@LUCIDA:
We turn to the last question, which is about the outlook for the future market.
I’ll share my view first: The market generally expects that the Federal Reserve’s interest rate cuts in the second half of this year or next year will bring significant liquidity, combined with bullish factors such as Bitcoin halving, many people expect to replicate the bull market of 2021. However, I hold a very pessimistic view towards this widely optimistic expectation because historically, highly consistent market expectations often come with enormous potential risks.
Especially for institutions like public mutual funds in the United States, although they belong to long-term holders, they also adjust their investment decisions based on market conditions and do not blindly chase after high prices.
HighFreedom:
My view is quite similar. This year’s market’s main upward wave started in November last year, especially after the spot ETF trading in January, the market experienced significant volatility. The liquidity and penetration rate increased, but mainly driven by retail investors. For example, 80% to 85% of the inflows into spot ETFs came from retail investors. In the second quarter, liquidity decreased, and penetration rate stagnated. My outlook for the third and fourth quarters is that I hope the liquidity can remain stable, and the penetration rate can increase further with the participation of institutional investors.
I believe that interest rate hikes or cuts do not immediately change liquidity but rather change the market’s expectations for future liquidity. My question is whether we can see a loose fiscal and monetary policy environment like in 2021, which seems unlikely at the moment. Therefore, I hold a cautious attitude towards the future performance of the market and hope not to see overly optimistic expectations.
There may not be significant changes in the market in the short term, and the liquidity expectations may include 4 to 5 interest rate cuts within the next 15 months, providing the market with steady expectations. However, the real release of liquidity will be slow, and significant rapid changes are unlikely to occur. Unless there is a severe economic recession or crisis, it is unlikely to see another loose fiscal and monetary policy environment.
So, if a severe economic recession does not occur, there is a high probability that this interest rate cut may be a so-called “asymmetric interest 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 took about a year to cut back to a low level. This time, the aggressive interest rate hike from 0-0.25 in March 2022 to 55.25 in May 2023 took a little over a year, but this interest rate cut may take a slow and gradual path.
Vivienna:
My conclusion is relatively simple and similar to everyone’s view. From July to the end of the year, the market may face less optimistic liquidity conditions. Even if interest rate cuts occur, there may only be one, which provides a positive expectation for the market but does not fundamentally change the 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 can still fill household savings and promote consumption. However, if inflation continues to rise, it may trigger trading expectations for a stagflation cycle. If high interest rates continue next year, and in some cases, further rate hikes are required, while the Treasury does not loosen its policies, this may lead to tighter liquidity next year. This is definitely not good news for markets that depend on liquidity, such as Bitcoin.
As for the wish for institutional investors to enter in large numbers, I think it is more of an expectation than a reality. In the current situation of poor basic liquidity, limited understanding of cryptocurrencies in the market, and high volatility, institutional investors are unlikely to heavily invest or establish positions. This expectation may be too idealized, and the actual situation may not be as we desire.
Albert:
Currently, the market’s short-term expectations lean towards bearish, especially for Bitcoin. Although there may be increased market 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 achieve an upward trend, it may depend on two factors: the substantial allocation of institutional investors and further improvement in investor sentiment. But this sentiment-driven rise may not be sustainable as high funding costs and high volatility are difficult to maintain in the long run.
My view is that the market’s upward trend will be a slow process as the inclusion 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 influencing market prices. Macro factors in the market may only be a factor driving market makers’ 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.
In general, there may not be a large-scale market crash or rapid rise in the short term, but a slow and prolonged process. Liquidity will also not experience significant 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.
