Seeing the Macro Forest for the Token Trees

Todd Groth of CoinDesk Indices shares some thoughts on how macro analysis works in crypto.

AccessTimeIconApr 26, 2023 at 4:35 p.m. UTC
Updated May 9, 2023 at 4:13 a.m. UTC

One thing I like about macro investing is the scope.

While financial analysts and their respective crypto degens counterparts are looking at balance sheets, earnings statements, Solidity code and social media sentiment, macro strategists get to think about the consequences of exogenous things.

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  • Put another way, while the analysts examine the forest tree by tree, macro investors sit on a hill, surveying the whole valley and considering which parts of the forest will be nourished or threatened by rainfall, forest fires, changes in land use and other factors outside of the idiosyncrasies of the micro analysis.

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    Being macro in digital assets means considering historical environments in which cryptocurrencies have thrived as well as more challenging environments, such as 2022.

    Last year, digital assets were clearly sensitive to the Federal Reserve’s efforts to tighten financial conditions. There are many ways to measure financial conditions, but to keep it simple we can simply use trends in nominal and real yields, U.S. dollar exchange rate baskets and corporate credit spreads. From these measures we can create a financial conditions indicator and see how it relates to the historical risk-adjusted performance of digital assets, as proxied by bitcoin (BTC) and ether (ETH).

    To estimate trends in these financial-condition proxies we utilize a trend signal similar to the one used in the Bitcoin Trend indicator (BTI) released recently by CoinDesk Indices.

    To represent nominal yields (“NomRates”), we use two-, five- and 30-year U.S. Treasury yields; we subtract the five-year breakeven inflation rate derived from TIPS to create a proxy for two-, five- and 30-year real yields (“RealRates”). U.S. dollar denominated baskets of advanced and emerging economy currencies are used alongside a broader basket as three proxies for the dollar (“FX_USD”). And option adjusted spreads (OAS) for high-yield corporate bonds rated BB and CCC are used alongside an investment-grade index to represent U.S. credit conditions (“Credit_OAS”).

    Trend signals are generated from the data within these four macro indicator buckets, then averaged to result in a positive, neutral and negative score for the financial condition regime. Risk-adjusted return ratios (annualized return per unit of volatility) are calculated on BTC and ETH within each regime and compared to an unconditional buy-and-hold strategy (“BuyHold”) shown in the figure below.

    (CDI Research, St Louis FRED)
    (CDI Research, St Louis FRED)

    From this preliminary macro regime analysis it’s clear that financial conditions matter when investing in digital assets. Keeping a pulse on market conditions, particularly real and nominal interest rates and credit conditions, can help to navigate the crypto cycle better by offering a better risk-adjusted return than a simple buy-and-HODL approach.

    In summary, as investors in cryptocurrencies we’d all benefit from taking a broader macroeconomic and market perspective to not miss the forest for the trees.

    P.S.: See you in Austin this week at Consensus 2023. Come meet the CoinDesk Indices team at booth #1306!

    Edited by Nick Baker.


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    CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk employees, including journalists, may receive options in the Bullish group as part of their compensation.

    Todd Groth, CFA

    Todd Groth was the Head of Index Research at CoinDesk Indices. He has over 10 years of experience involving systematic multi-asset risk premia and alternative investment strategies.