For today’s featured article, I’ll go into more detail on Part 1 – Fundamental Analysis of Picking Cryptos – Macroeconomics.
My last featured article overviewed how to pick quality cryptos using Fundamental Analysis (FA). You can find that article here (Fundamental Analysis of Picking Cryptos). In that first blog post, I organized the topics into four parts.
- Project metrics
- Blockchain metrics
- Financial metrics
What is Macroeconomics?
Let’s start by defining macroeconomics in general terms. Macroeconomics is a branch of economics that studies the overall economy, including financial markets, businesses, consumers, and governments.
You can think of macroeconomics as a top-down approach to data analysis. In other words, a top-down approach looks at broad topics. Specifically, it examines general economy-wide data such as:
- general price levels,
- economic growth rate,
- gross domestic product (GDP),
- consumer price index (CPI)
- interest rates, and more.
So, why would we apply macroeconomic analysis to crypto markets? One excellent reason is that crypto markets react quickly to external macroeconomic factors. For example, regulatory pressures from powerful countries like the United States, the European Union, or China significantly impact crypto prices.
Picking Cryptos – Macroeconomics and The Fed
Additionally, the markets react dramatically when the Fed increases or decreases interest rates. This year the Fed has scheduled several rate increases, effectively shrinking the flow of money. Higher interest rates mean it’s more expensive to borrow money. This affects businesses as well as people and causes fund managers to take money out of risky investments like cryptocurrencies.
On the flip side, when the Fed decreases interest rates, the markets tend to go up, including crypto markets. The availability of cheaper money allows businesses to expand and their bottom line to grow. Thus, rising profits raise stock prices, encouraging money managers to take on more risk and invest in crypto.
Four Steps to Picking Cryptos – Macroeconomics
Let’s expand on the four critical macroeconomic topics that should be considered when doing fundamental analysis on crypto.
1. macroeconomics – the state of investment markets as a whole
Before selecting any investment, whether crypto, stocks, real estate, or anything else, it’s essential to understand the current state of the markets as well as market sentiment. Key economic indicators measure current market conditions and forecast future trends.
The key indicators for U.S. stocks are the major American stock indexes. The DJIA (DOW), the S&P 500, and the NASDAQ indexes are all indicators of the stock market’s current state. They reflect investor confidence and thus may indicate the overall economy’s health.
These indexes are leading indicators and reflect whether the markets as a whole are up or down. Comparatively, they also reflect investor emotion in the current market cycle – euphoria, depression, or somewhere in between.
Another useful tool is CNN’s fear and greed index for the stock market. The Fear & Greed Index is a way to gauge stock market movements and whether stocks are fairly priced. The theory is based on the logic that excessive fear tends to drive down share prices, and too much greed tends to drive up share prices.
2. macroeconomics – the state of the crypto investment sector
When researching the current state of the crypto sector of investment markets, there are some key indicators to consider. However, it’s important to note that market indicators for crypto are very different from stock market indicators.
Some of the indicators I’ll list below are very difficult to quantify but should still be analyzed. For example, measuring the total number of positive or negative news stories would be difficult. In this scenario, I rely on my intuition to “read” whether the news is more upbeat or downbeat.
Here’s a partial list of indicators:
- Crypto headline news – mostly positive or more negative
- Negative news = massive hacks, expensive scams, restrictive regulation
- Positive news = breakthroughs in blockchain technology
- Investment cycle – prices way up or way down
- Bull market = euphoria
- Bear market = depression
- Fear and Greed indicator
- Social media sentiment
It may seem irrational to some people, but negative news will often cause fear and maybe even panic among novice investors. Overall scary negative news has been known to bring prices down, even for a short time. Moreover, negative news about a particular crypto project can be a death sentence for that project’s token, even if the news is inaccurate.
On the other hand, positive news (whether real or hype) can move markets in an upward trajectory. Sometimes it can be challenging to ascertain whether the information is accurate or just hype. Either way, it will likely move prices in one direction or the other.
Measuring the emotional pulse of the crypto markets can determine the strength of conviction of the investment cycle. Use the Fear and Greed indicator to get an overall feel for market sentiment. The more extreme the fear, the closer the cycle gets to depression and a potential market turn. Likewise, when the fear and greed indicator reaches extreme greed, market sentiment approaches euphoria, and a possible downturn looms on the horizon.
Additional research on market sentiment can be accomplished by looking into crypto social media sentiment. There are several paid tools available that are powerful but expensive. One of my favorite paid social media sentiment services is Santiment. For a look into bitcoin sentiment, there’s a free tool here.
This powerful AI-generated bitcoin sentiment chart presents impressive information. Augmento’s AI software collects data from Twitter, Reddit, and Bitcointalk and then organizes it into an interactive chart. Click on the chart to be directed to the interactive website. Hover your mouse over the orange line in the top half of the chart to find the current sentiment score and trending crypto topics.
3. macroeconomics – the state of the domestic economic environment
what is the status of inflation
is the government printing tons of money
high inflation means less buying power
less buying power means the economy slows
what is the status of unemployment
high unemployment means people can’t buy crypto
less money going into 401ks, less $ for fund mgrs to invest
Status of Fed interest rate hikes
multiple Fed rate hikes usually cause a recession
Status of GDP (Gross Domestic Product)
Rising GDP means businesses are doing well
Declining GDP means the economic environment is unfavorable for growth
4. macroeconomics – the state of the global economic environment
study interest rates of major global powers
are they following the US and raising rates or lowering rates
are other countries banning crypto or expanding crypto
what kind of sanctions are in place
Picking Cryptos – Macroeconomics Summary
I’ve given you a lot to think about when it comes to Macroeconomic FA for crypto. It’s important to note that it may not be necessary to study all of the topics I’ve presented here in order to get a feel for the state of the crypto markets.
To give you an idea of how to apply some of the steps above, I’ll share my evaluation of current macroeconomic conditions. I would sum it up like this:
- Crypto is down over 80%+ since the last all time high
- Fed is raising interest rates in multiple phases, fear of recession looming
- The Dow is down over 20% this year (that’s a lot for the stock market)
- The S&P is down over 17% this year that’s a lot for the stock market)
- Government regulators are going after certain crypto projects
- Crypto market liquidity is very low
We are definitely in a bear market cycle. This doesn’t mean crypto is dead, it just means it has slowed down for awhile. For me, this is a good time to buy and hold quality crypto projects.
I have a few resources to share that I’ve used over the years. They may help with your macroeconomic fundamental analysis. I know they’ve helped me.