Understand macroeconomics, not only to judge the market, but also to find direction in uncertainty.

"When the market has no way out

more attention will be paid to macroeconomics"

I often hear: those who look at macroeconomics don't make money. This kind of discrimination often comes from fundamental analysts who make conclusions at a certain point in time, but when the market goes in the opposite direction, people turn around and lament the macro analysts who have been proven wrong.

Why does this situation occur?

The essence is the mismatch between macro expectations and time and space—forecasts of long-term market trends cannot be used for short-term market entry and exit. Predicting the trend of the next year based on the trend of the first half of the year is based on assumptions and biases about past events, and black swan events such as financial crises and pandemics cannot be predicted or avoided.

01 Does the cryptocurrency market also need macroeconomics?

Two pieces of data: At the end of the bull market in 2021, the release of the Fed's dot plot reached the peak of the previous cycle; in March, the release of the Fed's dot plot led to Bitcoin's price falling below $70,000.

Now, due to the lack of a new narrative, the market has handed over the discourse to external macroeconomics and has begun to widely discuss liquidity issues. After the entry of Bitcoin ETFs, we have to pay attention to this powerful buyer. From a trading perspective, the difficulty of trading has indeed increased due to changes in market fund structure and the entry of new professional institutional funds, leading to the market often preemptively reflecting macroeconomic expectations, causing prices to deviate from industry fundamentals.

This change has led to confusion in trading, but our starting point often lies in the gradual convergence of macroeconomics and reality over time, finding resonance between fundamentals and macroeconomic margins, making our biased outputs more likely to be successful.

02 Simplifying macroeconomic analysis

Macroeconomics seems mysterious and difficult to penetrate, but it can be simplified into four aspects:

1. Rhythm

2. Fundamentals

3. Correlation analysis

4. Event logic

1. Rhythm: including economic data (unemployment rate) and inflation data (CPI). The Fed releases data regularly every month and uses it to formulate monetary policy, hence it is called rhythm. For example: if CPI gradually decreases in the first half of the year and the number of non-farm jobs decreases, it indicates that inflation is under control to a certain extent, and there may be a period of weak economy. The Fed's schedule of two interest rate cuts within the year is likely to be realized.

2. Fundamentals: First is the actual usage scenarios on the chain (active addresses, new addresses, gas fees). High activity and reasonable transaction costs usually indicate a healthy market dynamic, providing the foundation for a bull market; Second is the purchasing power of funds (off-chain Bitcoin ETF channels, on-chain stablecoin channels). Inflow of funds is the direct driving force for market growth in a zero-sum game market; Third is the behavior of market participants (longs, shorts, exchanges, miners), which often show different states at different stages of the cycle. For example, each bull market is accompanied by the distribution of long positions and the acceptance of short positions, and the start of a new major uptrend will encounter mining difficulties, requiring a reshuffling of the mining landscape.

3. Correlation: US stocks, US bonds, US dollar index. The Nasdaq index, which is a risk asset similar to Bitcoin, is positively correlated with Bitcoin; US bonds act as a market liquidity absorption tool and have a negative correlation with Bitcoin; the US dollar, as the underlying leverage, a stronger US dollar index will passively increase the amount of margin, increase the cost of debt repayment, and may lead to financial pressure and default risk.

4. Event logic: It is placed last, but it is often the most important. Fragmented events need to wait for the impact of post-event market events, and are supplemented with different weights. For example, the entry of $10 billion in off-chain funds—ETF events acted as a catalyst for the bull market in the first half of the year, but small-scale security vulnerabilities and hacking events may only attract attention in a local area and have limited impact on the overall market.

03 The lag of macroeconomics

The analysis of the above macroeconomic indicators/events often comes from hindsight, and there may even be path dependence. Statistical analysis based on high-probability outcomes often has a lag. Industry insiders have been exploring whether it is possible to find an early indicator to take the lead.

It's difficult.

Because when the market forms a consensus expectation, it has already been priced in. If the market has not formed a consensus, it means that this influencing factor has been chosen incorrectly. From a trading perspective, it often follows the trend and is difficult to re-enter positions against the trend. People are more inclined to follow the trend rather than bet against it.

What research can do is to judge whether the market deviates from actual impact, whether it is overpriced, and to find opportunities in the deviation between reality and coin prices, and to join the force of market correction. The past is the foundation of the future, and the present is the direction of the future. Research is the confirmation and falsification of future predictions, leading to the transformation, collapse, and reshaping of research systems and frameworks.

04 Market considerations under the current macroeconomic background

The US economy is strong, and the monetary environment is maintaining high interest rates under the expectation of interest rate cuts. Non-farm employment data has not loosened, and CPI is gradually approaching the 2% target, but is still above 3%. The fundamentals of cryptocurrencies are weak, with more than half of Ethereum's transactions flowing to layer two, and layer two consumes only 1.5% of Ethereum's gas fees. In simple terms, 50% of the demand only brings in 1.5% of the revenue. New addresses and active addresses have also dropped to their lowest levels of the year as prices have fallen. Since Bitcoin entered a period of consolidation, the bull market has entered a strange state of stagnation, with various market participants unwilling to release their chips in anticipation of better prices. But now, there are signs of short positions and miners fleeing.

In terms of correlation, both US stocks and the US dollar index are strengthening. In the context of T-bill oversupply, the market prefers US stocks over cryptocurrencies, and the cryptocurrency market is feeding the Nasdaq. Nvidia's first-half gains were nearly 150%, three times the increase of Bitcoin. In the context of recovering liquidity, the preference for AI concept stocks is stronger than for highly volatile cryptocurrencies in the short term. In the absence of a new narrative in the short term, the competitive benefits of stocks and cryptocurrencies are stronger than the spillover benefits.

With a large release of VC coins with high FDV in the second half of the year, the market needs new purchasing power, or in other words, needs to release purchasing power through a pullback:

Scenario 1: Innovation in gameplay/system, the benefits of a strong narrative driving off-chain capital inflows, and Bitcoin's market share rising to a new level.

Scenario 2: Bitcoin's price fluctuates below $56,000 (breaking through three cost lines): short-term holder cost line, miner shutdown price, ETF long-term holder cost price. In the short term, the market is cleared by pressing prices, accumulating on-chain stablecoins and purchasing power. Within three months, due to event-driven positive points, the bull market restarts, replicating the second peak of 2021. However, if the time is too long, it is easy to disperse confidence within the circle, leading to the reversal of the bull market being unable to overcome pessimistic expectations, and the market will slump into a bear market phase.

In conclusion

The current market has no way out, and more attention is paid to "macroeconomics". It requires going beyond short-term fluctuations to gain insight into deeper trends and structural changes. But it is important to understand that the complexity of macroeconomic analysis means that no single indicator or event can completely determine the direction of the market. It also has its limitations, but understanding macroeconomics is not only for judging the market, but also for finding direction in uncertainty.

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