Do you trade macro?

By akohad Oct18,2022


Active portfolio manager: Do you think trading crypto based on macroeconomics is a smart strategy… is it going to be relevant?

Me: It’s linked to global events and sentiment, so yeah.

Last week in a conversation with a crypto asset management firm, I received this question and found several streams of consciousness falling into place. Here are four basic reasons why cryptocurrencies cannot be untethered entirely from global macro events in today’s market.

1. Cryptocurrencies become more appealing where local currencies are failing.

Growing up in North Cyprus, I took the stability of our currency for granted for a few years. When I arrived as a college freshman in the States, $1≈5 Turkish Lira (TL), and by the time I graduated, that number climbed to 16.69TL.

Source: Markets Insider

Today that incline keeps getting steeper, demanding 19TL per dollar. North Cyprus has suffered from Turkey’s 83% inflation, a 24-year high, and shows no signs of stopping. The BBC estimates that this figure is grossly underestimated and that the annual rate is actually 186.27%. What does that mean for Cypriots? For starters, the island is heavily dependent on imports, and prices are so unstable that grocery stores stopped changing them. Instead, you’ll find imported goods on shelves labeled with a sharpie in dollar prices. “This way, we don’t have to print new labels every day,” a shopkeeper told me. Secondly, Cypriots are turning to crypto with over 20 new offline and two online crypto exchange offices established in the past couple of years. Whereas TradFi has 22 banks with 235 branches across the North. Crypto office presence rippled throughout the island, growing from zero pre-inflation to around a tenth of TradFi presence.

2. Cryptocurrencies are decentralized by definition, globalized by nature.

Like any other asset, crypto is affected by its users. And with currencies as globalized as BTC, ETH, or SOL, what happens in each user’s economy can shape their use case for being invested in the space. Whether a user is facing hyperinflation, recession, or seeking an offline wallet that is out of authoritarian regime reach, economic crises abroad and global events matter. This point is short and simple but shouldn’t be overlooked. Chainalysis provides a visual depiction of how international crypto adoption looks in 2022. The report highlights that Vietnam leads in grassroots adoption based on the number of people putting the biggest share of their money into cryptocurrency, and the US ranks fifth.

Source: Chainalysis

3. Investor sentiment is a synonym for confidence, and confidence doesn’t affect investments in isolation.

As NLW nicely summarized on CoinDesk’s The Breakdown podcast,

“It’s not really about coming into conviction about any of the specifics. But conviction that the possibilities are worth investing in. Taking a real shot at crypto and seeing if it can disrupt work in a changing world in a way that is a net benefit to humanity, is a possibility worth investing in.”

Unfortunately, in this bear market we have witnessed a lack of conviction ripple through the S&P 500 and strong macro forces at work in crypto markets, despite the two having vastly different features and use cases. Just hours after the Federal Reserve said it would hike interest rates by another 75 basis points on September 21, BTC-USD briefly fell 6.5% to $18,600 — its lowest level since June. Inflation reports this quarter and monetary policy decisions support arguments that crypto and equities are correlated. Even after the Ethereum Merge, ETH-USD reverted to tracking the tech-heavy Nasdaq 100. As historic inflation figures drive the price of everything from fuel to food to record highs, investors feel pressured to shy away from anything they perceive to be a risk asset.

TLDR, DeFi broadly in line with TradFi market expectations, sentiment priced in.

Source: Fundstrat’s digital asset strategist Sean Farrell shows a 30-day correlation change between ether (ETH-USD) and $QQQ, a popular ETF that tracks the Nasdaq 100.

4. Global adoption does not imply global DeFi education.

Last year, a Pew Research survey of over 10,000 Americans showed that 16% of adults say they have used some kind of cryptocurrency, and 43% of men aged 18–29 claim to have invested in, traded, or used a form of cryptocurrency. Women in the same age range had a lower reported result of 19%. This year, a Gemini report surveying nearly 30,000 adults across 20 countries highlights that while women in the space may be outnumbered, they are catching up. 47% of those who plan to purchase crypto for the first time in the next year are women. Zooming in on the US, 32% of current crypto owners are now women. The crypto gender gap is narrowing, but we clearly still have some progress to make.

One barrier to ownership is education. Crypto evolved from a niche investment to an established global asset class very quickly, leaving a lag time in education in its shadow.

“Globally, respondents were nearly twice as likely to say that more educational resources on cryptocurrency would help them get started with crypto (40%), compared to recommendations from friends (22%).”

What about the education of those already invested? Unfortunately, many retail and institutional investors don’t have a firm grasp on crypto’s inner workings. When crypto education is not widespread, people crutch onto the sentiment of their TradFi portfolio and market headlines. According to a 2021 Cardify survey, only 16.9% of crypto investors “fully understand” it, while just over 33% have limited or “zero knowledge.” In February last year, over 40% of crypto investors were newbies riding the hype wave. Some perceive the entry barriers to DeFi to be high and literacy hard to attain. This can nudge current and potential investors into relying more on the macro environment… what’s MicroStrategy doing? Has Musk tweeted again about Dogecoin? Which athlete is earning their salary in BTC (or regretting it)? How is gold trading during the Russia-Ukraine war?

While it is arguable whether understanding the technical inner workings of crypto is necessary, understanding the solutions it provides is not. Recognition that this new asset class offers an escape valve to the problems of the TradFi system is essential. Access to stablecoins alone is a significant opportunity to attain USD in neutral rails worldwide, independent of central banks. In an ideal world, the value of crypto and the DeFi space it sits in would be perfectly understood across income classes, educational backgrounds, and risk appetites. That way, it could trade based on the successes and failures of the industry itself. It’s L1, and L2 protocols, trends in capital raises, innovation in infrastructure…metrics unique to the ecosystem that reflect the conviction that the possibilities are worth investing in.

Until crypto education is widespread and absorbed, macro sentiment will be a crutch.

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By akohad

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