Bitcoins Recent Rally Presents a Difficult Macro Test
Bitcoin’s recent surge to an 8-month high has some thinking about the current state of the broader crypto market. Bitcoin ended the week trading at $86,000 and well above the $64,000 level where many saw it heading toward prior to the recent rise. At the same time, a series of macro events including rising interest rates and U.S. Treasury yields and a lackluster showing for the first wave of technology-focused exchange traded funds continued to pressure stocks. For the purposes of this article, Bitcoin’s recent “macro test” is the primary area of focus.
The First Big Breakout of the New Uptrend
As the week started, the first big breakout above $86,000 occurred as investors considered a variety of macro events. The focus of this article is to provide a framework for the crypto market where participants can identify the areas of biggest risk and biggest opportunity. Along the way, we’ll consider a series of macro-related questions.
Interest Rates and Crypto Are Often at Odds
For the purposes of this article, we’ll assume the first of several potential macro tests for Bitcoin is intact. Labels and definitions in the crypto world often conceal more than they reveal. Consider the recent New York Department of Financial Services’ approval for Paxos Trust Company to take custody of and hold Bitcoin. Does this mean that NYDFS has given permission for Paxos to operate a Bitcoin wallet? Or does this mean that Paxos can now act as a Bitcoin custodian? Or is there a distinction? Should we be thinking about the 50,000 foot view and consider the possibility of U.S. regulators green-lighting the creation of a Bitcoin-based exchange traded fund? Or are we talking about a policymaker’s statement concerning interest rate policy?
ETFs and the Market Structure Tell Different Stories
A second question is one of magnitude. Early data points (such as early transaction data or prominent market announcements) can signal potential market structure changes, but do not guarantee it. For example, for Bitcoin, more and larger market participants adopting it in various ways (e.g., liquidity, counterparty, regulation, security, and safety of market structure changes, etc.) would provide more evidence for the use case.
The next evidence would be sustained use.
Sustained use would not preclude the risk of using such an infrastructure. The same infrastructure that provides for greater market efficiency can fail in new and unanticipated ways. If the rules for an automated system are too broad, assets can be moved too slowly, or too rapidly. Prices can become out-of-date, and assets can be misvalued. Losses can occur outside the system that market participants believe they are protecting. Therefore, the various aspects of Bitcoin’s infrastructure should be assessed in concert, and not in isolation.
What is necessary to sway the market?
The focus of the article is limited. The article relies on primary or previously reported sources. Attributed statements are distinguished from the authors’ opinions. Where a subject is reported to have made a statement, it is reported verbatim. This is true for Bitcoin as, from a regulatory and market structure perspective, many of the outstanding issues are political and legal.
The Bitcoin Macro Test
Readers of the Bitcoin Macro Test tend to overly affirm or dismiss with very little in between. Given the unpredictability of markets, an equivalent emphasis on evidence is advisable. The evidence is more objective, and the market’s first interpretations of that evidence tend to be more subjective. The useful habit is to return to the evidence first and take note of what changes operationally. Who among the users or the institutions carry out what was suggested in the post? Is the risk that was identified and pointed out in the post, mitigated? Was the risk merely transferred? The post is to be defended if and only if the second look test is affirmative. More often than not, the reason to revise the analysis is to be found in the findings from the second look test.
What has been discussed thus far extends far beyond the Bitcoin Macro Test. Crypto, in general, allows financial journalists to practice good journalism by outlining the assumptions behind operational risks, thus helping consumers of financial news evaluate risks and come up with their own conclusions. These control points may determine system governance, settlement or other operational aspects of the system. It’s useful to consider the control points before coming up with a conclusion.
Because of the nature of crypto and blockchain, it’s useful to take a wait-and-see approach. The first and perhaps the only, noticeable change may be reflected in price and/or volume. Other changes are likely to be observed in how the system is governed and/or integrated, and/or reported operational changes. Users of the Bitcoin Macro Test understand to look past the first and perhaps only, noticeable change. It’s likely that the system will experience improvement in the governed and operated aspects of the system, as opposed to price and/or volume improvement. Discipline in evaluating the governed and operated aspects of the system should be maintained.