Macroeconomic factors affecting Bitcoin prices

I will briefly summarize the macro data I observe daily and some of the judgment methods based on their possible impact on the price of Bitcoin. They are not necessarily correct, nor are they absolute influences that are either one or the other. Since the weights are unknown and multiple factors may be superimposed at the same time, it is not possible to rely on a single factor to make a judgment on the rise or fall of the price of Bitcoin. Therefore, I generally choose indicators with higher probability or use cross-validation to improve the judgment success rate, thereby guiding medium- and long-term transactions.
A better way to utilize these indicators is to use more data analysis tools to track the price changes of Bitcoin behind the changes in these indicators, give these indicators dynamic adjustment weights, and simulate a judgment model with a relatively higher accuracy.

Primary impact (observable index): US dollar index, gold price, federal funds rate, US Treasury yield
Secondary impact (liquidity indicators): USD liquidity (Federal Reserve balance sheet, RRP, Treasury TGA account balance)
Level 3 impact (expectation impact/emotional impact): dot plot, speeches by Fed officials, labor market data, inflation data, inflation expectations, ISM manufacturing and non-manufacturing PMI, crude oil prices, corporate inventory data

First-level impact (observable index):

Federal Funds Rate:
As the most commonly used monetary policy tool of the Federal Reserve, the level, fluctuation range, and fluctuation expectations of the federal funds rate are closely related to the prices of various assets. Generally speaking, raising interest rates (raising the federal funds rate) means withdrawing money, tightening liquidity in the market, and is not conducive to the rise of risky assets. The opposite is true for lowering interest rates. However, the transmission of this impact is very complicated. It is not that risky assets will fall when interest rates are raised, and will rise when interest rates are lowered. There are also superimposed effects of economic cycles, financial cycles, and emotional cycles. Friends who want to know more can learn about the transmission mechanism of monetary policy. They must first understand the issuance and circulation of the US dollar before they can understand Bitcoin. It should be noted that the federal funds rate is also known as the overnight interbank lending rate. It is not an interest rate directly adjusted by the Federal Reserve. The Federal Reserve needs to adjust the statutory reserve ratio, overnight reverse repurchase rate, excess reserve ratio, Federal Reserve discount rate and other direct interest rates in the short term to affect long-term interest rates such as mortgage rates and corporate bond rates, which is the interest rate corridor, to affect interbank fund flows and thus affect the overnight lending rate.

U.S. Treasury yields:
The status of U.S. Treasury bonds as an anchor of financial market assets is well known, and changes in U.S. Treasury yields directly affect the flow of funds. For example, a rise in U.S. Treasury yields (generally based on 10-year bonds) usually means that the market is biased towards economic slowdown or recession, and when the yield curve is inverted, the possibility of recession is higher. At this time, funds are more inclined to safe-haven bond assets, which is not conducive to the rise of risky assets. But the relationship between U.S. Treasury yields and Bitcoin prices is by no means that simple.
Facts have proved that in the past one or two years, the US Treasury yield curve has been seriously inverted, and all indicators point to a recession (but in fact the economy is very resilient), but it has never stopped the momentum of risk assets soaring. Refer to the asset allocation logic of the Merrill Lynch clock at different stages. Because the recession, stagflation, recovery, and overheating periods distinguished by the Merrill Lynch clock depend not only on the stage of economic development, but also on the inflation level. Both of these will change, and the boundaries are not so obvious and observable, so the probability of using them as investment basis should be discounted. In addition, Bitcoin's attributes as an anti-inflation asset, a commodity, and a trading medium are also switching all the time. Since the probability of judging the economic cycle based on the US Treasury yield needs to be discounted, it is also very complicated to judge the price trend of Bitcoin by the rise and fall of the US Treasury yield or the slope of the yield curve. Unless we see that the economic growth data has actually entered a recession, the winning rate of this judgment basis will increase.

US Dollar Index:
Since the US dollar index has a profound impact on US dollar liquidity, US bond yields, US inflation, and even US stocks, it cannot be simply linked to the rise and fall of Bitcoin prices. However, Bitcoin, like gold, is a US dollar-denominated asset. If the influence of other factors is known, the US dollar index and Bitcoin prices should be negatively correlated statically.

Gold Price:
Generally speaking, gold is negatively correlated with the US dollar index and the US real interest rate (they have been rising together in recent times, which is not a common situation. It is driven by war demand and the central banks of various countries selling US bonds and increasing their gold holdings). One reason is that gold, as a commodity, is denominated in US dollars. When the US dollar rises, the gold price falls. The US real interest rate is related to the federal funds rate and the 10-year Treasury yield. When the US Treasury yield rises at the same time as the interest rate increases, and the pace of interest rate increases cannot keep up with the pace of the increase in the US Treasury yield, the real interest rate will fall or even turn negative, causing recession expectations, and the price of gold as a safe-haven asset will rise.
As a commodity and a safe-haven asset, Bitcoin will strengthen its correlation with gold for a certain period of time, especially when the Russian-Ukrainian war just broke out, when the correlation was much greater than that with SPX. However, the correlation was not that great when the conflict between Israel and Iran broke out. One of the reasons for this was probably that gold, as a safe-haven asset, had too much preemption, and at the same time, the US GDP and PCE data lowered expectations for interest rate cuts, and Bitcoin was more of a risky asset at that time. Therefore, the correlation between the price of gold and the price of Bitcoin depends more on the properties of Bitcoin at that time.

Secondary impact (liquidity indicators):

USD liquidity
(Federal Reserve Balance Sheet, RRP, Treasury TGA Account Balance)
The federal funds rate affects asset prices by controlling the money multiplier or money flow through interest rate control, and the control of the source of money comes from the joint action of the Ministry of Finance and the Federal Reserve. The Ministry of Finance issues treasury bonds, and the Federal Reserve publicly buys and sells treasury bonds in the secondary market to achieve balance sheet management, thereby controlling the issuance of M0. The Ministry of Finance receives funds from treasury bond sales and stores them in the TGA account, and controls the increase and decrease of the TGA account to achieve liquidity collection and release. Generally speaking, the Fed's balance sheet reduction and interest rate hikes are both manifestations of liquidity collection, and the reduction of the Ministry of Finance's TGA balance means an increase in liquidity in the market.
There is a generally accepted method for calculating US dollar liquidity in the market, namely:

USD liquidity = Federal Reserve balance on balance sheet - RRP (overnight reverse repurchase) balance - Treasury TGA account balance

The overnight reverse repo rate is also one of the important tools used by the Federal Reserve to adjust the federal funds rate. Because when the overnight reverse repo rate is higher than the federal funds rate, the market will choose to keep money in the Federal Reserve (therefore, when liquidity is tight, the overnight reverse repo rate is often the upper limit of the federal funds rate), which will not create a money multiplier and help absorb market liquidity. The liquidity in the overnight reverse repo and the liquidity in the Treasury's TGA account are both "dead money" and do not create a money multiplier, so this formula is generated.

As a US dollar asset, the price of Bitcoin is naturally related to the liquidity of the US dollar. Sufficient liquidity is good for all growth assets. Therefore, the scenario that investors of risky assets such as Bitcoin are happy to see is: the Fed expands its balance sheet (releasing money) + overnight reverse repurchases decrease (releasing money) + the Ministry of Finance consumes TGA (releasing money)

Level 3 impact (anticipated impact/emotional impact):

The third layer of impact is mainly the short-term impact of expectations and emotions on market operators.

The dot plot is the views and expectations of the FOMC members on future monetary policy. It helps investors and analysts understand the inclination of the Fed's monetary policy and provides the market with a way to understand the Fed's overall assessment of the economic situation and expectations for future interest rate trends. The dot plot is a probability forecast of interest rate hikes or cuts, and it changes frequently. Every time we see the number of expected interest rate cuts this year, it comes from this.

The minutes of the Fed's interest rate decision are also very important. Because it provides insights into the Fed's decision-making, helping investors better understand the Fed's policy orientation and the possibility of future actions. The minutes also provide a detailed assessment of the US economic and monetary policy situation, which helps market participants more accurately assess risks and opportunities. Analysts will compare the minutes of the latest interest rate decision with the previous one, looking for any clues of changes to speculate on the Fed's attitude towards the economic situation, labor market, and interest rates, and then infer whether the future monetary policy will be dovish or hawkish.

The speeches of the Fed Chairman and voting members are also catalysts for market sentiment. The Fed Chairman is famous for his "art of speech" because the Fed achieves its monetary policy goals through expectation management, and does not necessarily need to make clear statements so as to lose the room for bargaining with the market, which is even more difficult to operate. Just like the content expressed in the meeting minutes, a dovish stance is good for the financial market, while a hawkish stance is bad.

The strength of the labor market and inflation data are important reference standards for the Fed's monetary policy, because the Fed's dual goals are full employment and price stability. The so-called full employment does not mean a very low unemployment rate, and price stability is not deflation, so there is a natural unemployment rate of about 4% and an inflation target of 2%. While raising interest rates to reduce inflation, the Fed also pays close attention to changes in the labor market. When the unemployment rate is below the natural unemployment rate, it means that the labor market is tight, and workers' hourly wages may rise, resulting in an increase in purchasing power, which is not conducive to reducing inflation. Therefore, we can see that whenever there are signs of a weak labor market (including an increase in the number of initial unemployment claims, an increase in the unemployment rate, a decrease in the labor participation rate, an increase in job vacancies, an increase in the resignation rate, and a decrease in hourly wages), it drives expectations of a rate cut, because it means that the impact of interest rate hikes on the economy and society has already become apparent. After all, interest rate hikes will make it difficult for companies to raise funds, increase some basic living costs for the public, and shrink overall demand.

Inflation expectations are a relatively detailed existence. We know that the Federal Reserve achieves its monetary policy goals through expectation management, and the Federal Reserve will not wait until inflation has reached 2% or the unemployment rate has soared before cutting interest rates. Therefore, whether inflation is going up or down is more important than the current inflation figure. The observation of this sub-item is mainly obtained by observing the sub-indicators of the consumer market. For example, the ISM manufacturing and non-manufacturing PMI, when this data exceeds the dividing line (usually 50), it means that economic demand is still strong, which is more supportive of inflation recovery; rising commodity prices such as crude oil also push up inflation expectations.

Corporate inventory data and the central bank's monetary policy may also affect corporate inventory levels and inflation rates by affecting interest rates and credit conditions. Generally speaking, if corporate inventory levels are high, it may mean that product demand is low and supply exceeds demand. In this case, companies may lower prices to promote product sales, thereby curbing inflation. On the contrary, if corporate inventory levels are low, it may indicate that product demand is high and supply exceeds demand, which may lead to price increases, thereby driving inflation.