Earlier this month the Federal Reserve Bank of New York published a report Analyzing the impact of macroeconomic Factors on the price of Bitcoin the Authors were surprised to find that BTC Is not as correlated to macro factors as It should be considering that investors See it as a risk asset today I'm going To summarize the fed's Bitcoin report Tell you what it says in simple terms And explain why this could be a sign That BTC and the rest of the crypto Market is decoupling from other assets The report begins with a brief Introduction where the authors highlight How the total crypto market cap managed To hit 2.5 trillion dollars at its peak In 2021 with bitcoin's own market cap Touching 1 trillion The authors consider the possibility That btc's past price action was Determined by macro factors to assess This the authors analyzed 30-minute time Frames where macro factors were Presumably the only things affecting Btc's price in other words they only Looked at btc's Price action when it Appeared to be directly related to a Macro Factor not some crypto-specific Factor like the collapse of FTX for Example The authors divided these macro factors Into three categories news about the Real economy such as unemployment
Statistics news about inflation such as The Consumer Price Index or CPI and news About monetary policy such as a change In interest rates or the fed's intention To change rates in the future the Authors specified that they looked at How btc's price responded to these macro Factors between 2017 and 2022 this is Because BTC reached a quote more mature Stage starting in 2017. this seems to be A reference to the launch of Bitcoin Futures on the Chicago Mercantile Exchange used by institutions in late 2017. If you watched our video about the Wyckoff method you'll know that some Crypto Traders believe the launch of the Bitcoin Futures on the CME is when Institutions started manipulating the Crypto Market Market manipulation has Since extended to other cryptos namely Eth which is now also on the CME anyways The authors go on to reveal that btc's Price wasn't affected by macro factors As much as other assets the authors are Surprised by this because they see BTC As a quote asset with no intrinsic value Meaning that the entirety of its price Action should be due to outside factors Such as macro sounds like the problem is Their premise not the outcome In all seriousness the authors admit That there's little to no research about What affects crypto prices much less the
Effect of macro factors on btc's price They reference a research paper which Found that crypto prices are determined Primarily by crypto specific factors and Adoption rates which makes sense Naturally there's no shortage of Research about what affects the price of Other asset classes including macro Factors the authors explain that they Apply similar methodologies in their Analysis of BTC and include an analysis Of gold and silver as well I take this As a tacit admission that BTC is digital Gold now the second part of the report Unpacks how the authors modeled BTC as a Speculative asset with no intrinsic Value and I must admit that the maths Flew over my head to my understanding The model states that btc's price is Determined by interest rates which are In turn determined by macro factors for Content text when interest rates are low Debt becomes cheaper and it becomes Easier to borrow this results in an Increase of the total money supply which Basically causes the price of everything To go up interest rates have been low Since 2008 and this is part of why the Price of everything has been going up When interest rates are high debt Becomes more expensive and it becomes Harder to borrow this results in a Decrease of the total money supply which Basically causes the price of everything
To go down this is what we've seen since The FED announced it would be raising Rates in November 2021. the catch is the Fed didn't start raising rates until the Spring of 2022 the reason why the Markets reacted sooner is because Investors are always pricing in what's Going to happen in the future recall That this forward guidance is one of the Three macro factors the authors included In their report this leaves unemployment And inflation now the reason why these Are relevant to interest rates is Because most central banks have been Explicitly instructed to make sure that Unemployment and inflation both stay low In the case of the fed the unemployment Target is four percent and the inflation Target is two percent now central banks Achieve this dual mandate by changing Interest rates higher interest rates Result in lower inflation but higher Unemployment lower interest rates result In more inflation but lower unemployment News flash central banks have been Raising interest rates to lower Inflation this is why investors have Been anxiously awaiting every single Inflation statistic lower inflation Means that the FED will lower interest Rates sooner and that means more money Creation via borrowing and of course More money creation means that the Markets go up especially risk assets
Like BTC Investors have been anxiously awaiting Every single employment statistic too That's because higher unemployment means That the FED will be forced to lower Interest rates which means more money Creation as such it's good news for the Markets when people lose their jobs Which is messed up what's even more Messed up though is that it's bad news For the markets when people are getting Jobs and especially when they're getting Big raises this is because of something Called the wage price spiral wherein big Raises result in more inflation which Results in bigger raises and so on you Can learn more about what's been going On with interest rates by checking out Our most recent update about the fed and That will be down in the description so Now that you understand why the author's Analysis focuses so much on unemployment Inflation and interest rates you will Hopefully understand their three Hypotheses the first hypothesis is that News of higher interest rates will have A negative impact on btc's price or else Being equal the second hypothesis is That news about future interest rate Changes will have a bigger impact on Btc's price than news about current Interest rate changes this makes sense Because the fed's announcements affect The markets more than the actual rate
Hikes or Cuts do this is again because Investors are always pricing in the Future if the FED says it's going to Raise interest rates next month the Markets will crash today by the time the Actual rate hike comes around however Nothing happens assuming of course fed Gem and Jerome Powell doesn't say Anything too dovish or too hawkish now The third hypothesis is that the price Of speculative assets such as BTC will Be affected the most by interest rate Related news on that note I'll leave a Link to our video about the upcoming Crypto catalysts that could take us out Of the bear Market bottom in the Description be sure to check it out Anywho the third part of the report digs Into the data the authors revealed that The reason they didn't include other Cryptocurrencies in their analysis is Because they're not as liquid as BTC in Plain English they don't trade as much As BTC and this means it's harder to Analyze their price action the authors Seem to be in awe of the fact that Bitcoin's market cap Grew From 1 billion In 2013 to over 1 trillion in 2020 and More than 1 000 X increase the authors Also seem to have made a typo because They mistakenly note BTC as having a Market cap of 400 million in December Last year not very professional chaps They then explain that they measured
Btc's price action using a whole host of Fiat currencies not just the US dollar They compared btc's price action to Precious metals like gold and silver They also compared btc's price action to Other traditional assets like stocks Whereas the author's analysis of btc's Price action focused on 2017-2022 their analysis of the price Action of other asset classes spanned The period 2000 to 2022 to clarify the Authors only looked at Price action that Was presumably caused by macro factors Across all of these asset classes that Said they did drop some juicy statistics About Bitcoin Btc's average annualized return since 2012 was 270 or almost 3x per year by Contrast the average annualized return For the S P 500 was just 11 per year During the same period gold and silver Apparently remained flat hmm not Surprisingly BTC was quote magnitudes More volatile than all the other assets Even on shorter term time frames to put Things into perspective the authors Found that the most BTC had crashed in Five minutes was 31 and the most it had Pumped in five minutes was 84 percent That is some serious volatility The authors then do an analysis of what They refer to as monetary surprises this Is when the FED did something that Investors weren't expecting such as
Announcing a massive rate hike or cut or Actually doing a massive rate hike or Cut without any forward guidance not Surprisingly the largest rate cut Happened in response to the 2008 Financial crisis when the FED dropped Interest rates by 0.75 or 75 basis Points the largest rate hike happened Last spring when the FED raised interest Rates by 75 basis points to try and Suppress surging inflation the authors Also do an analysis of macroeconomic Surprises which should be Self-explanatory they underscore the Fact that markets are forward-looking Meaning that something which has yet to Occur affects asset prices today the Authors account for this using some very Complex maths they then divide these Macroeconomic surprises into three Categories news related to the actual Economy such as retail sales news about Future activity in the real economy such As the ism index which tracks future Manufacturing and news about prices such As the CPI and PPI the PPI is Particularly important because it is the Fed's favorite inflation gauge put Differently it's how the FED measures Inflation now don't get me wrong the FED Cares about the CPI too but only insofar As it affects the inflation expectations Of the average person expectations can Affect future inflation what's annoying
Is that the authors omitted Macroeconomic surprises related to the Pandemic in their analysis they say this Is because macro news was abnormally Volatile for obvious reasons however I Would say this info is important Nonetheless because BTC saw massive Gains in 2020 and 2021. this ties into The fourth part of the report which Reviews the results of the analysis Oddly enough the authors found that Btc's Prize did not react to the fed's Comments about raising interest rates in June 2021. this is odd because November 2021 is when the FED announced it would Be raising rates it's also odd because Btc's price did in fact react to the Fed's comment as did the stock market Both started to crash if you watched our Recent video about Tesla stock you'll Know that the fed's November 2021 Comment literally marked the top for Tesla and many other tech stocks this Might be because the authors only Analyzed btc's price action within 30 Minutes of the macro news being released As some of you will know a lot of the Macro news such as the CPI comes out at 8 30 am EST meanwhile the markets open At 9 30 am and BTC only seems to react When institutions are trading in any Case the authors found that a surprise Announcement that the FED would be Dropping interest rates would cause the
Stock market to Rally by almost four Percent on average if I understand Correctly this correlation apparently Isn't as strong for BTC which again Doesn't make much sense the same is Somehow true from macroeconomic Surprises which the authors say affected The price of every asset they analyzed Except BTC call me crazy but I'm pretty Sure I saw btc's price crash after the CPI for January recently came in hotter Than expected especially when the Markets opened at 9 30 am to their Credit the authors take some time to Examine these inconsistencies in the Fifth part of the report this Examination includes assessing whether Interest rates and macro related news Impact btc's price more when the 30-minute window is expanded to longer Time frames like one hour and one day Believe it or not but the authors found That interest rate and macro related News does not significantly impact btc's Price even with longer time frames they Admit that this inconsistency could Ultimately be due to the fact that there Isn't nearly as much data for BTC as There is for the other assets they Analyzed now the final part of the Report is the conclusion it's just one Paragraph and it says what you'd expect Quote in our empirical analysis we find That Bitcoin is unresponsive to both
Monetary and macroeconomic news in Particular the result that Bitcoin does Not react to monitoring use is puzzling They reiterate that more data is Required to understand how btc's price Is affected by interest rate and macro Related news I would argue that the data Is already there they're just making it More complicated than it needs to be by Including a bunch of extra maths that is Completely unnecessary so this brings me To the big question and that's whether The crypto Market is decoupling from Other assets after all altcoins follow BTC just with more volatility if btc's Price is unaffected by interest rates And macro news then logically the same Is true for altcoins Market manipulation Notwithstanding the only problem is that The fed's analysis of btc's correlation To macro factors is clearly not accurate And the authors seem to be aware of this Even though they don't admit it in case It wasn't clear enough btc's correlation To macro factors began when Institutional investors started getting Involved this is simply because Institutional investors see BTC eth and Other large cap cryptocurrencies as Being like tech stocks except riskier This is why cryptos correlation to tech Stocks is the strongest this begs the Question of when this correlation began And the answer is probably 2017 with
Those CME Futures regardless Institutional investors pay very close Attention to things like interest rates Inflation and unemployment this is why The crypto Market is similarly reactive To these macro factors particularly when The stock markets are trading during the Week it's not just institutions in the USA either and to be clear cryptos Correlation into the stock market isn't A bad thing as the authors mentioned It's a sign that the crypto Market is Maturing Not only that but crypto's correlation To the stock market may be a temporary Phenomenon crypto could eventually Become more correlated to something else The elephant in the room here is Precious metals like gold and silver BTC Is considered by many to be digital gold And institutions like Fidelity even Wrote reports arguing that this analogy Was accurate unfortunately it wasn't Really reflected in btc's price action It remained correlated to tech stocks Even so I'm convinced that BTC and other Cryptocurrencies will soon become more Correlated to Precious Metals this is Because BTC and most altcoins have no Counterparty you truly own the asset More importantly BTC and most altcoins Are credibly neutral nobody can stop Your transactions these qualities are Very attractive to individuals and
Institutions that are at risk of having Their assets seized or Frozen for Whatever reason right now the Institution that want these kind of Assets the most are those that are not On good terms with the United States Such as those in Russia for example However as governments start to roll out Their Central Bank digital currencies The seizure and freezing of assets will Inevitably become more common and it Won't just happen in hostile countries It will happen to domestic individuals And institutions that disagree with or Actively oppose the status quo make no Mistake the moment that governments Start to do this the demand for Self-custodial assets like cash precious Metals and cryptocurrencies will Spike Then again this assumes that governments Will succeed at rolling out their cbdc's Which is extremely unlikely based on our Research if you've watched any of our Videos about cbdc's you'll know that the Voluntary adoption rate is very low Between 4 and 12 percent to be exact the Same goes for the digital IDs that will Be required to roll out cbdc's this is Why many speculate that the people in Power will manufacture a crisis to force The adoption of both speculation aside It's more likely that Fiat currencies Will continue to lose their value which Will likewise cause a mass Exodus to
Hard assets like precious metals and Cryptocurrencies with maximum supplies Some would say this is already happening And it's a trend that's going to Accelerate in the coming years the only Question then is what BTC will be worth In objective terms it looks like we're Going to find out [Music]
