Macroeconomic Indicators

Crypto is generally portrayed as being a challenge to traditional finance. Bitcoin’s use case as an effective store of value means that it should have an inverse relationship to key indicators of the health of the system it is intended to replace. You’ll often hear the phrase ‘safe haven’ asset, for example.

The reality is that it is yet to conclusively demonstrate that relationship, but there are some things that are worth keeping a close eye on:

The Dollar Index (DXY)

The DXY is a measure of the US Dollar against a basket of other world currencies. A fall in the DXY suggests dollar weakness and a rise the opposite. The DXY and Bitcoin broadly correlate inversely, as a weakening dollar suggest flight from the world’s reserve currency into better stores of value.

Stock Markets

Though BTC may move inversely to dollar strength, it is yet to de-couple from stock markets which have benefited from ongoing stimulus since the 2008 financial crisis.

This seems counter-intuitive to Bitcoin’s value proposition, but suggests that both are benefiting from the same kind of investment behaviour – the search for yield in a low yield environment. In other words, anything that gives a better return on savings than the record low base interest rates. 

This means that crypto investors will cheer both the dollar’s demise AND the ‘number goes up’ mentality of major stock markets. 

Signs that Bitcoin’s relationship to the stock markets is changing are significant, because as things stand, a very simplistic analysis suggests that the levers that the US Treasury and Federal Reserve pull are also connected to Bitcoin price

Bond Yields

Another important macro indicator that is watched by crypto traders are Bond Yields. Bonds are forms of tradable debt, most commonly the way governments raise money. A bond always has a coupon or return and a maturity date.

The coupon should reward the investor in excess of expected inflation, otherwise the Bond would provide a negative real return. Coupons therefore go up as maturity increases because there is greater uncertainty about inflation going forward.

Increasing Bond Yields are therefore a leading indicator of inflation, and Bitcoin should fair well in an inflationary environment because of its store of value characteristics. The relationship isn’t however that straight forward. If inflation is anticipated this might reduce the necessity of the kind of stimulus that has also been strongly correlated to price increases within crypto markets.

Though the leading and lagging indicators we have discussed play out in the short term, as the lens starts to zoom out away from the specifics of price and volume, the line starts to blur between Technical Analysis and strays into what we’ll focus on in the next article, analysing broader measures of adoption and influence on price, known as Fundamental Analysis.