Technical Tuesdays Part I: Macroeconomics and Policies
In case you missed it, we shared last Friday on what influences our decisions in investing. You can read about it here: Crypto Investing: A Squid Game?
Hello and welcome to our first Technical Tuesdays!
Here, we put on our lens on the current trends and the big-picture view of the crypto industry and the world.
Read along with us and imagine, you’re the Master of Coin in the Game of Thrones universe, preparing for the winter.
- China Bans Crypto for the nth Time
- US Senate passes Infrastructure Bill, awaiting Biden’s signature
- Binance to prohibit Singapore users from trading on the main platform, stops offering derivatives on Australia.
- SEC chair Gensler latest stance on Crypto and DeFi lending
- ICYMI, El Salvador buys more bitcoins
What Makes a Market Move?
Is probably the question you’re asking everyday.
If we have a definite answer for that, life would be boring, like in the time of Westeros under King Baratheon’s reign.
Here are some factors we think, that might influence the markets.
- Macroeconomic conditions — The overall picture of global economy
- Regulations and policies — Geopolitics and regulations by institutions
- Technical factors — Inflows and outflows of funds, aka Supply and Demand
- Valuations — Is the market undervalued or overvalued?
Let’s dissect and analyze each factor below.
Macroeconomics simply means a branch of econ that studies how an overall economy behaves.
Just like in the Seven Kingdoms, each House manages their own trade and taxation, overseen by the Master of Coin.
Bitcoin and cryptocurrencies was born on the back of the financial crisis of 2008.
It was touted as a peer-to-peer cash system, without intermediaries, and outside the influence of the Central Banks.
The cryptoeconomy is still in its nascent stage, with parallels to agriculture in Westeros, likened to DeFi farming, and commodity extraction (crypto mining).
Disruption of trade routes in the Kingdom, like what’s happening in real life on supply chains and in crypto infrastructure (transaction congestion) happens very frequently.
One chart that we’d like to reference the whole crypto industry is the Bitcoin to US Dollar chart (BTCUSD pair).
In trading and investing, you have an asset that’s ready to be traded for an asset you want to buy. In this case, it’s cash (USD) against bitcoin.
This trading pair is denominated first by the base pair which is BTC, and the quote pair which is USD. That’s the same as trading Euro to US Dollar in the Foreign Exchange market.
Now you ask, when to buy and when to sell?
If it’s that easy, everyone’s a billionaire already!
We humans have a recency bias to seek out the asset we intend to reward ourselves, like apes drooling on bananas, and disregard the assets that we currently own, in this case the USD.
Here, we see the other side of the coin, the Dollar Index, denominated as DXY.
A clear macro trend emerged when Bitcoin is strengthening and trending upward, while the Dollar is also weakening, vice versa.
There were times that both assets are erratic and moving sideways in a range.
After the 2017 rally, funding dried up as ‘solutions’ were finding problems, not the other way around.
Right now, the trend is still intact but as you can see, the Dollar Index (at 93.7) is starting to break to the upside, while BTC (42K) is pointing to the downside.
The traditional cycle in an economy starts when interest rates fall, and businesses can loan at a cheaper interest to do commerce, to spur productivity.
Economies grow, increasing demand simultaneously with supply alongside the upward trend of population.
Inflation picks up, where necessities like food, clothing, shelter shoot up in prices, leaving a little for managing your own house.
Does crypto fit in the Boom-Bust cycle?
Certainly! Bitcoin was born when banks are on the brink of collapse, that was around when interest rates started to fall due to the housing crisis of 2008.
Central banks like the FED and Bank of Japan, have embarked on unconventional policies like Quantitative Easing, where they acquire other assets, usually bonds, to decrease the borrowing cost of businesses and consumers.
Petyr Baelish, the former master of coin, has borrowed heavily even from the Iron Bank of Braavos to fund the Seven Kingdoms.
The Central Banks *indirectly* influence the Dollar, which is the current reserve currency of the world.
You’d hear often that US has been printing money nonstop.
See that almost vertical bar from 2020? That data point shows us that US FED has printed 40% of the total USD in existence from just a year ago!
Policy and Regulations
Even with the regulations closing in, crypto is still pretty much in a very wild wild Westeros.
Different macro themes can influence crypto but country-level regulation is another big factor, affecting the industry mostly on the short to mid term.
In 2017, China banning Bitcoin triggered a 40% correction, followed by a rally up to 20k USD. For context, way back 2014, the bulk of trading was denominated in CNY (Chinese Yuan).
In 2019, a pronouncement of China praising Blockchain tech triggered a 40% increase in price, before going down in a matter of days.
Recently, China announced a ban on crypto (again), with a 9% setback, now trading sideways.
Even in GoT, the Iron Bank of Braavos invested a lot in keeping the mother of dragons as one of the contending leaders, alongside with her draconian policies.
We all knew what happened after, right?
Year-to-Date return (YTD) is another metric that we use to measure the Return of Investment (ROI) of an asset, from the start of the year to the current date.
We’ve discussed before in the chart above about crypto indexes and how you can use them to your advantage.
Basically, an index track a basket of coins with certain sizes and category. One category is DeFi (green line) which outperformed the other indexes on the 1st quarter of 2021, but lagged on the other timeframes.
If you want exposure on coins without the risk of each coin in your portfolio, you can include indexes in your strategy.
Technical Factors and Valuations
We’ll expound more on this later. Technical factors include supply and demand (the inflows and outflows of funds), volume, price data, etc.
Institutions has been continuously pouring in funding, with at least two publicly listed companies adding crypto, directly into their balance sheet.
That’s for Part I of this Macro and Technical Tuesdays.
We’ll be exploring next week on Part II: Technical Analysis and Valuations of projects.
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To end the article today, here’s Tyrion’s line as a Master of Coin.
“I’m quite good at spending money, but a lifetime of outrageous wealth hasn’t taught me about managing it!”
Disclaimer: The above post is for educational purposes only, and must not be construed as an investment advice. Please do your own research and manage your risks, accordingly.
The writer is not responsible for the early demise of Lord Eddard Stark.
DeFy Trends is a women-founded, all-in-one, intuitive, real-time analytics application and chrome extension that uses on-chain analysis and high tech data science algorithms to provide data insights based on DeFi fundamentals and sentiment. By scraping the web and social media for cryptocurrency sentiment analysis, incorporating real-time market data, qualitative data, and forecasting AI to bring retail and institutional investors state of the art insights on the rapidly growing crypto-decentralized finance markets.