CoinMarketCap Academy takes a look at the long-term effects of macroeconomic events on Bitcoin and how you can maximize your trading gains during this situation. Read more!
In the past few years, the macro-economic landscape has shifted massively. We saw a pandemic and its corresponding restrictions set fire to an already broken supply chain. Quantitative easing was deployed at unprecedented rates and inflation rates are through the roof.
Governments, banks, traders and investors, all respond to these events in one way or another, which can result in significant moves across the board. In today’s article, we will discuss the impact these macro-economic events can have on Bitcoin, as well as the influence of monetary policy on the crypto markets.
To do that, we must first analyze the driving forces behind price.
What Makes Markets Move?
I believe markets move based on a combination of two things. Firstly, the (weighted) average view on the future of all market participants. And secondly, how do these market participants think assets will perform considering these views.
The outcome of these two variables combined results in a bias, one that might be different for every other market participant. Assuming people position themselves based on their bias, I conclude that supply and demand are based on these biases as well. In other words, the market moves based on how the market views the future. Or at least, that is how I view it. Exceptions exist, as individual investors can always decide to buy or sell for other reasons, or no reason at all. For example, Peter might have to pay for his medical bills or Xiu’s portfolio reaches sufficient value to make that one purchase she dreamt of.
Macroeconomic Events and Bitcoin
Assuming my “what makes a market move” hypothesis to be true, explaining the impact of macroeconomic events on Bitcoin should not be too complicated.
Generally, when macro-economic news hits the presses, I ask myself the following question(s):
Does this affect the bias of market participants (including mine)?
Markets are incredibly quick at reacting to the news, as people (and bots!) attempt to position themselves for new biases. However, they often overestimate the impact the news has and cause the price to move more violently than necessary. This creates opportunity.
The chart below shows how Bitcoin responded to the latest inflation data, marking down close to 3% in the 90 minutes that followed the news. From there, Bitcoin bounced back to retrace nearly half of that down move. It is only after that retrace that the market started to show its new fair value, based on the updated biases in the market.
This suggests that you have approximately 1-2.5 hours to form an opinion on the question I asked earlier. You don’t have to trade the original move, you just have to form an opinion on whether or not the average bias changes, and how.
Based on your answer to the question, you will know how to position yourself, and whether or not to go against the original move right after the news. And as always, not having an answer to the question is fine too. You can’t possibly know everything.
Now to successfully anticipate macro-economic events, you need to stay up to date. Usually, the signs are there. If you pay attention, there will be people telling you about upcoming events such as pandemics, inflation, or even war, before they hit the headlines. Find some people that fit that description and pay attention to their reasoning.
Soon, you will pick up how they seemingly know the future, and you just might be able to build your own “crystal ball”. Jokes aside, all you can do is make educated guesses based on the available information. That way, you can anticipate future events, rather than react to them as they happen.
Monetary Policy and Crypto
As already discussed in the intro, governments also have their responses to macro-economic events. A major and relevant example lies in the response of central banks to the economic downturn during covid-restrictions. Governments around the globe announced changes in their monetary policy.
Monetary Policy is a toolbox that governments and central banks use to control the supply of money. Popular tools in the toolbox are quantitative easing and the changing of interest rates. These tools are used to steer inflation and prices, and with that, the economy.
These changes in policy have real-world effects, which means they may affect the biases of traders and investors alike. As you can see in the chart above, major policy announcements can be turning points in the market.
All in all, the past two years have shown Bitcoin and crypto to be “more like asset classes” at the mercy of macro-economic factors. While traders used to get away with trading the chart purely based on technical analysis, I believe having a basic idea of what is going on in the world is more important than ever.
Conclusion
Navigating the macro-economic landscape can be incredibly complex, and it takes time to get familiar with all theories and concepts. However, investing some time in this will not only benefit your trading but your personal financial situation too. After all, you can make more educated purchasing decisions, both in and outside crypto.
By combining your current trading skillset (whether that be fundamental analysis, technical analysis, or both) with analysis of the macro-economic environment, you will become an even more competent trader or investor.
I’ll leave you with a credo I can never repeat too many times: “To trade successfully, you must analyze the future, not the present”. Invest time into this, the clearer you can estimate the future, the better you will trade.
Writer’s Disclaimer: This article is based on my limited knowledge and experience. I enjoy learning and sharing my ideas with readers like you, but my articles should never be construed as advice in any shape or form. I am not an expert, nor a financial advisor. I wish you the best of luck.
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