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Trading 101: Macroeconomic Factors That Can Affect Crypto Prices

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2022-08-19
Trading 101: Macroeconomic Factors That Can Affect Crypto Prices

There have been times when Bitcoin prices show a move subsequent to economic outlook. The most recent movement to be recorded was on August 10: Bitcoin jumped to US$24,000 shortly after the Bureau of Labour Statistics released their CPI numbers for July and continued to surpass US$25,000 a few days later. That’s too coincidental to be a coincidence, and this article aims to shed light on the magnitude of macroeconomic effects on crypto traders’ behaviour.

Market report for last week can be found here: Bitget Hot Takes (August 08 - August 14).

How Cryptocurrencies Find Their Way Into The Global Financial System

Bitcoin has made the global headlines persistently since 2017 and now considered the emerging asset class. The promising technology behind cryptocurrencies as well as the scarcity of many digital assets (including Bitcoin) secure them a place on many big players’ balance sheets, therefore any change in the economic policy can lead to an adjustment in crypto demand from these stakeholders.

More obvious correlation between Bitcoin and other assets

A blog post by the International Monetary Fund (IMF) earlier this year shows that Bitcoin price is tracking the stock market more effectively since 2021.

International Monetary Fund (IMF)

Source: IMFBlog

Meanwhile, recent data from Kaiko tells us that the correlation between Bitcoin price and the tech-savvy NASDAQ 100 remains above 50% for the last three months despite a messy May and its aftermath.

NASDAQ 100

Source: Kaiko Analytics

The largest cryptocurrency displays a clear tendency to move in tandem with the stock market in general, meaning what hits stock markets could also hit Bitcoin. The relationship between Bitcoin and bonds is yet to be confirmed, but the trend from November 2021 to March 2022 is negative, once again proves the correspondence between Bitcoin and stocks. If you are not familiar with the subject, bonds and stocks usually have an inverse relationship, which is to say stocks go up when bonds decline.

With Bitcoin dominance hovering around 40%, the global crypto market often shows signs of progress when there is a rise in BTC price. That would make crypto indirectly subject to economic policies.

Growing presence of traditional institutions in crypto markets

One word for the financial world must be ‘interconnectedness’. In many cases, derivatives products can function as forecasts of spot prices, giving hints into the expectation of investors in the next periods. When talking about the SP500 or NASDAQ100, we know that they are representatives of the U.S. largest companies, hence these indices can demonstrate the general market sentiment.

In the case of cryptocurrencies, and Bitcoin in particular, there are several things to watch out for: the global market cap, the 24-hour spot volume, futures open interest rates, futures 24-hour volume, long/short ratio, and Bitcoin ETFs. These are updated daily in the Bitget Bites Series on Bitget Academy at: Twitter | Telegram | LinkedIn | Facebook | Instagram

Bitcoin ETFs give participants of traditional markets the opportunity to capitalise on lucrative returns of BTC without holding the digital asset directly. And the growing number of Bitcoin ETFs, especially with the mounting pressure on the Securities and Exchange Commission (SEC) for spot Bitcoin ETFs, is reflecting the enormous demand from institutional investors, who can exert substantial influence on Bitcoin prices. Even BlackRock, the world’s biggest asset manager with more than US$10 trillion in its portfolio, has recently launched its first private BTC trust. The sentiment observed in such markets will eventually be transferred to the Bitcoin spot market, thus triggering a price reaction from cryptocurrencies.

Funding is another aspect that could mirror the behaviour in traditional finance (TradFi) markets. More capital at hands means that Venture Capitalists (VCs) and Investment Funds can support more crypto startups, hence driving the value of the crypto industry higher. It is fair to assume that the crypto bull run of 2021-22 had perfectly collided with the influx of capital into blockchain companies over the same period.

blockchain

Source: Bloomberg

How Crypto Markets React To Macroeconomic Changes

Considering the ties between cryptocurrencies and TradFi actors and the fact that the economic situation frames most of our life choices, the decision to invest in digital assets should of course be affected by macroeconomic changes.

Inflation interest rates

There are several ways through which inflation can impact crypto prices. A healthy dose of inflation is an indicator for the reasonable rise in spending, which, in turn, stimulates production, guarantees jobs, and relieves the repayment obligations for debtors. However, the FED will step up to curb rampant inflation by raising interest rates.

Often referred to as the next-gen hedge against inflation, Bitcoin and cryptocurrencies are believed to perform better when the consumer price index (CPI) soars. Is that really the case? Let’s consider the 3-month time frame from March to May 2022 below:

blockchain

Source: Kaiko Analytics

This period marks the all-time high correlation between Bitcoin returns and NASDAQ100 and the widespread expectation of inflation's dramatic increase. High inflation hurts investors, as their profits may turn out to be losing after being adjusted. And some studies point out, there might be a negative correlation between stock value and inflation, meaning that earnings may contract during periods of spiralling inflation. Since Bitcoin’s correlation with NASDAQ100 keenly follows the inflation expectation, we can speculate on a consistent decline in Bitcoin prices and returns, which is actually the case here:

case

BTC/USD chart from the beginning of 2022.

Source: TradingView

Another thing affected by higher interest rates is the cost of borrowing, hence the contract in funding reserves for crypto startups and the availability of capital, be it for investment or trading purposes. Meanwhile, falling BTC prices can point to better prices and higher volume of short Bitcoin funds such as ProShares’ Short Bitcoin Strategy ETF (BITI) as well as a great opportunity for other Bitcoin trusts to accumulate the digital asset.

You can be part of the price determination process

Futures trading is an indispensable product of crypto exchanges for two main reasons:

(1) many use futures contracts to resist a sudden movement in crypto prices and

(2) now that some countries regulate the holdings of crypto assets, futures trading offers a gateway to crypto trading without ownership.

As the leading derivatives exchange in the space, Bitget provides 60+ pairs for contract trading, a maximum leverage of 125X and supports five settlement currencies (USDT, USDC, BTC, ETH, EOS). Your position on Bitget futures can serve as a buy/sell signal for traders of the corresponding spot markets. If you don’t know much about trading, we suggest you check out Bitget One-Click Copy Trade, Bitget’s product designed to encourage crypto derivatives trading. The trader network of Bitget consists of experienced traders and followers, with the former mapping out a comprehensive trading strategy so that the latter can make profit just by initiating identical orders. That way you do not only help determine the final price for crypto assets but can also earn good money without too much trouble.

Intrigued by crypto futures activities? Check out our guides below and sign up here:

What is Futures Trading?

What is Margin Trading?

Bitget USDT-Margined Futures

Bitget Coin-Margined Futures

Bitget Copy Trade Guide For Newbies

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