Hey Siri, what is a hard asset that can’t be debased by the government? And how does its purchasing power compare to the dollar’s over time?
Bitcoin is a hard asset with a fixed supply that can’t be tampered with by the government. While the dollar’s purchasing power decreases over time, Bitcoin’s purchasing power rose exponentially over the last decade.
Thanks Siri, now explain like I’m 5 years old.
You need more dollars to buy a house today than you needed 10 years ago. But you need way less Bitcoin.
So What?
You worked hard and saved some shekels over the years. But you recognize that governments cant resist the temptation to create free money for themselves.
If you don’t convert fiat dollars (money issued by the government) to an asset that maintains its purchasing power over time, Uncle Sam will eventually debase your savings.
The Market Cycle
Bitcoin is not only volatile, its price tends to follow the rhythm of a four year cycle that roughly corresponds with its issuance schedule (halvings) and global liquidity.
Liquidity consists of all cash and credit available to financial markets, once the immediate transactions needs of the real economy have been fulfilled.
As I described in Counting Cards, one way to manage the volatility of Bitcoin and other risk assets is to increase exposure when an uptrend is most likely and decrease exposure when odds favor a downtrend.
Hey Siri, if bitcoin price and altcoin market share provide a bird’s eye view of the crypto cycle, where might we look for a more nuanced perspective about the present moment and where we are in the cycle?
A combination of macro and crypto indicators can provide a more nuanced perspective about where we are in the cycle and how to position the most volatile crypto allocation of your portfolio.
Timeframe and Expectations
Before we explore specific macro and crypto indicators, let’s acknowledge the significance of timeframe and expectations.
Timeframe
Low timeframe traders often focus on charts with candles measured in minutes or hours. In order for an indicator to be useful to a low timeframe trader, it needs to update in close to real time. So technical analysis based on price action, trading volume, and other metrics derived from price and trading volume are useful. GDP which is updated quarterly? Not so much.
High timeframe traders often focus more on charts with daily or weekly candles and update positioning less often (eg. monthly).
There are many ways to make money as an investor. But when the four year cycle yields over 10x returns if you get the timing remotely right, that’s enough volatility to achieve most financial goals. So I mostly focus on high timeframe tactics aligned with trading the four year crypto cycle.
Expectations
Asset prices reflect a consensus set of expectations. This means we need to consider indicators and how aligned expectations about them are with reality.
Both fear and greed can divorce expectations from reality. Investors do best when they bet on beliefs that don’t match consensus expectations for the future AND those beliefs end up being true.
So the ultimate goal is to develop and bet on beliefs that better match reality than consensus expectations.
Macro Indicators
Asset prices tend to rise when growth and productivity exceed expectations, rates are low (capital is cheap), and there is abundant liquidity competing to purchase assets.
The most volatile assets will increase the most in price during periods of rising asset prices. So investors prefer volatile assets when growth, productivity, and liquidity are increasing and/or rates are decreasing.
Note: we care more about rate of change than we care about levels since levels are likely already reflected in asset prices. For example, rates unexpectedly increasing from 2% to 5% is more likely to cause a downtrend in asset prices than rates held steady at 5%.
Growth and Productivity
Investors tend to dial up risk when growth and productivity indicators, such as GDP and earnings growth, are likely to exceed expectations.
Rates
Rates matter because they influence borrowing costs and spending decisions of households and businesses.
Low rates = Cheap capital = More spending = More growth
The risk free rate is also a key input to discounted cash flow models investors use to value assets. Higher rates discount future cash flows more and drag down asset prices.
Liquidity
If asset prices are a function of supply and demand, liquidity is a key demand driver because liquidity is the amount of capital in the economy available to fund growth and drive up prices by bidding on assets.
This piece by CrossBorder Capital examines global liquidity and the MSCI World index.
Crypto Indicators
While macro indicators help us model demand for risk assets (a rising tide lifts all boats), crypto indicators help us assess supply and demand for specific tokens.
Since an asset price is determined by the marginal buyer and seller, we need to classify active market participants and determine whether they are more likely to buy or sell at a point in time. More on how we do that in a future piece.
Until then, Glassnode has an excellent piece on the predictive power of on chain data and the Capriole macro index analyzes over 35 macro and crypto indicators to see what fundamentals say about the market.
tldr; Don’t Fight the Flows
So from top to bottom, these are the questions we examine:
Are investors buying risk assets?
What is crypto’s share of risk asset flows?
What is Bitcoin’s share of crypto flows?
When might crypto flows rotate from Bitcoin to Alts?
Which Alts are most likely to benefit from the Bitcoin to Alt rotation?
Answering these questions is both art and science. It requires humility to acknowledge the future is unknowable and conviction to trust that probabilistic beliefs about the future are still useful.
Maybe one day Siri will have all the answers (or even just play the right song I request during a run).
Until then, we work hard, stay disciplined, keep learning, trust conviction, and aim to consistently win more when we are right than we lose when we are wrong.
