April 26, 2023

Insights and analysis for the professional investor

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Welcome to Crypto Long & Short!

This week, Glenn Williams Jr. discusses a new CoinDesk tool called the Bitcoin Trend Indicator, which can help traders spot where BTC is headed.

Then, Todd Groth of CoinDesk Indices shares some thoughts on how macro analysis works in crypto.

As always, get the latest crypto news and data from CoinDeskMarkets.com.

– Nick Baker

From the Analyst

As Crypto Grows, So Does CoinDesk's Commitment to Keeping Pace

Proximity to information and access to new tools is one of the things that I value most about being at CoinDesk. Each day there's cutting-edge access to news and early looks at tools that we as a firm are looking to bring to the marketplace.

The new Bitcoin Trend Indicator (BTI) from CoinDesk Indices is useful for investors, specifically those looking to employ systematic, non-discretionary strategies. Successful and timely identification of trends in price movements is paramount to any active investing strategy – and that's something BTI appears to deliver.

While this new tool might not be so useful for investors engaging in a long-term, buy-and-hold strategy, for those with a tactical bent – a penchant for entering and exiting positions quickly – it's got significant value. It should work well in tandem with watching seasonality, which is particularly important following the crypto winter markets endured for much of 2022.

As a practitioner of technical analysis, I view visual identification as a tried-and-true method of identifying trends. You pull up a chart, observe the extent to which prices are moving and apply trend lines to provide a graphical outline of those trends. They can effectively be used to identify and project the direction of an asset's price movement, with breaks below or extensions above being instances worth noting.

An application of this directional identification approach would likely identify bitcoin's (BTC) uptrend since January, following a two-month period of relatively flat, range-bound trading. Breaks of the trendline can be seen in early March and April 19, when BTC took a brief pause amid its massive 74% gain to start 2023. Similar patterns appear for ether (ETH), given its 53% recent uptrend and trendline breaks occurring on the same dates.

Candidly, a degree of subjectivity exists when drawing trendlines. Where I draw my trendline may be completely different from where a colleague draws one. Methodology can vary as well. Where one may connect trend lines at an asset's closing price, another may draw the trendline at its high or low price for the day.

This is not meant to call into question the practice itself, but to highlight potential variations in the analysis of identical data. From my vantage point, it's no less subjective in nature than picking one valuation multiple over another when performing fundamental analysis.

Historical price data can be used to identify seasonality and trends as well. Past pricing data can be separated into buckets related to time, and used to identify patterns.

For example, pulling daily price data for BTC from 2014 to present shows that October has produced the highest average daily return in comparison to other months, a gain of 0.53% per day. The worst month has been September (a 0.16% average loss), with a stretch of consecutive average positive daily returns existing from February to August historically.

Investors can also narrow the time period of evaluation to a more recent time frame to evaluate the extent to which performance may have shifted.

Of note in 2023 is the somewhat sporadic monthly returns, with underperformance in February and April, surrounded by outperformance in January and March. The lack of a discernible trend in instances like this highlights the need for objective, quantitative-based tools to evaluate trends. As crypto matures and the base of crypto investors widens, so, too, will the need for tools that strip the emotion out of allocation decisions. CoinDesk's Bitcoin Trend Indicator can do that.

In a nutshell, the BTI identifies the "presence, direction and strength of momentum in the price of bitcoin." It is calculated daily at 4 p.m. ET (20:00 UTC at this time of year), using prices from the CoinDesk Bitcoin Price Index (XBX), our BTC benchmark.

The five BTI signals, (color coded for clarity from red to green) are significant downtrend, downtrend, neutral, uptrend and significant uptrend.

A look into its methodology shows that a series of moving average crossovers are utilized within four distinct crossover windows of varying lengths. Exponential weighting is used to fully capture the importance of more recent prices.

A backtest of the BTI shows it identified an uptrend in October 2020, before BTC jumped to $40,000 from $10,000. From a risk management vantage point, it also identified movement to "neutral" from "uptrend" in May and November 2021, before substantial drawdowns.

A missed signal can be seen in late March 2022, when the BTI signaled an uptrend before a 59% drop through June. It's also worth noting, however, that while the uptrend was identified on March 28, the BTI identified a neutral signal on April 8 and a downtrend signal on April 10.

There is no Holy Grail indicator, so I expect other false signals. I find comfort seeing that the BTI has demonstrated an ability to quickly adapt to a changing landscape however.

I would encourage all who are reading this to give the BTI a look, particularly those who are looking to build systematic, non-discretionary strategies. Give it a try, poke holes in it, completely ignore any bias that I may have towards it and see how it fits into your own investment process. Feel free to let us know how you feel as well, whether positively or negatively. Feedback can be the lifeblood of improved processes.

Our goal at CoinDesk is to constantly provide products and services that add value to your own.

– Glenn C. Williams Jr., CMT

Cboe Digital is a U.S. regulated exchange and clearinghouse bringing trust and transparency to the crypto spot and derivatives markets. Cboe Digital honors a separation of duties and includes intermediaries as a key tenet in managing risk and avoiding conflicts of interest. Our unified spot and derivatives markets are underpinned by responsible innovation and enable collateral efficiency. www.cboedigital.com.

Institutional Outlook

Seeing the Macro Forest for the Token Trees

One thing I like about macro investing is the scope.

While financial analysts and their respective crypto degens counterparts are looking at balance sheets, earnings statements, Solidity code and social media sentiment, macro strategists get to think about the consequences of exogenous things.

Put another way, while the analysts examine the forest tree by tree, macro investors sit on a hill, surveying the whole valley and considering which parts of the forest will be nourished or threatened by rainfall, forest fires, changes in land use and other factors outside of the idiosyncrasies of the micro analysis.

Being macro in digital assets means considering historical environments in which cryptocurrencies have thrived as well as more challenging environments, such as 2022.

Last year, digital assets were clearly sensitive to the Federal Reserve's efforts to tighten financial conditions. There are many ways to measure financial conditions, but to keep it simple we can simply use trends in nominal and real yields, U.S. dollar exchange rate baskets and corporate credit spreads. From these measures we can create a financial conditions indicator and see how it relates to the historical risk-adjusted performance of digital assets, as proxied by bitcoin (BTC) and ether (ETH).

To estimate trends in these financial-condition proxies we utilize a trend signal similar to the one used in the Bitcoin Trend indicator (BTI) released recently by CoinDesk Indices.

To represent nominal yields ("NomRates"), we use two-, five- and 30-year U.S. Treasury yields; we subtract the five-year breakeven inflation rate derived from TIPS to create a proxy for two-, five- and 30-year real yields ("RealRates"). U.S. dollar denominated baskets of advanced and emerging economy currencies are used alongside a broader basket as three proxies for the dollar ("FX_USD"). And option adjusted spreads (OAS) for high-yield corporate bonds rated BB and CCC are used alongside an investment-grade index to represent U.S. credit conditions ("Credit_OAS").

Trend signals are generated from the data within these four macro indicator buckets, then averaged to result in a positive, neutral and negative score for the financial condition regime. Risk-adjusted return ratios (annualized return per unit of volatility) are calculated on BTC and ETH within each regime and compared to an unconditional buy-and-hold strategy ("BuyHold") shown in the figure below.

Source: CDI Research, St Louis FRED

From this preliminary macro regime analysis it's clear that financial conditions matter when investing in digital assets. Keeping a pulse on market conditions, particularly real and nominal interest rates and credit conditions, can help to navigate the crypto cycle better by offering a better risk-adjusted return than a simple buy-and-HODL approach.

In summary, as investors in cryptocurrencies we'd all benefit from taking a broader macroeconomic and market perspective to not miss the forest for the trees.

P.S.: See you in Austin this week at Consensus 2023. Come meet the CoinDesk Indices team at booth #1306!

– Todd Groth, CFA, head of index research at CoinDesk Indices

Takeaways

From CoinDesk Deputy Editor-in-Chief Nick Baker, here's some news worth reading:

GEMINI'S GAMBIT: Gemini, the Winklevoss twins' crypto exchange, plans to open a derivatives platform outside the U.S. – initially offering bitcoin perpetual contracts. Gemini's bigger rival, Coinbase, is also toying with the idea of setting up shop outside the U.S. It's really no surprise at all that U.S.-based crypto businesses are thinking overseas thoughts as American regulators crack down hard on the industry. The question is whether folks in Washington really want to risk forcing crypto onto foreign turf. For all the anti-crypto talk from the likes of Senator Elizabeth Warren, there's plenty of support for aspects, at least, of the industry from conventional financial circles and other politicians.
MORE COINBASE: Coinbase isn't just mulling whether to create an exchange outside the U.S. It is asking a court to compel its regulator, the Securities and Exchange Commission (SEC), to finally decide on whether existing securities laws apply to digital assets. This appears to be a preemptive move by Coinbase to argue that the SEC hasn't given enough guidance for U.S. crypto companies.
WAKING UP: A strange thing has been happening lately with bitcoin. Several large wallets with roots in the early days of this whole blockchain experience have begun waking up and are moving BTC around. Why these whales have awakened is far from clear, though there's some speculation they've been cracked by nefarious actors. Yes, security still matters in crypto.
ETH'S HANGOVER: Ether (ETH) rallied strongly earlier this month after the Ethereum network was upgraded to allow staked ETH to be unstaked. But that rally, which arguably made ETH more appealing to investors by removing a major obstacle, has now basically disappeared.

To hear more analysis, click here for CoinDesk's "Markets Daily Crypto Roundup" podcast.

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