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The macro trend of the dollar, how much impact on the encryption industry?

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Interpret the change of dollar, the macro variable of cryptocurrency price fluctuation, and grasp the trend of cryptocurrency market from the four-wheel drive.

原文标题：《 This Is the Single Most Important Macro Factor That Affects Crypto 》

原文作者： Tascha labs

原文编译： TechFlow Intern

There is one macro variable that alone accounts for more than 50% of cryptocurrency price movements. What does it mean for the value of your token wallet? The variable I'm referring to is dollars.

I compare THE BTC price and cryptocurrency market cap to a basket of macro factors. The price of the DOLLAR, as represented by the DXY index, has the most obvious correlation with cryptocurrencies.

54% of the time, year-over-year changes in BTC prices can be explained by DXY alone.

Up - & gt; Cryptocurrencies fall and vice versa.

The arrival of 2018, the last crypto bear market, coincided with a major trend reversal in the DOLLAR, and BTC came back from the dead as the dollar began to fall in early 2019. Which makes you wonder, are cryptocurrencies driven by BTC halving, as they would have you believe, or by dollar valuation cycles?

You say the price of cryptocurrencies is in dollars. So if the dollar goes up, of course cryptocurrencies go down. Or you could argue that cryptocurrencies are risk-on assets and the dollar is risk-off. Of course they should be negatively correlated. Doesn't that seem like a problem?

Indeed, there is also a negative correlation between DXY and commodities, which are mostly traded in DOLLARS, and between DXY and the stock market, which are risk-oriented assets.

But DXY explains only 24 percent of changes in gold prices and 7 percent of changes in the S&P 500 -- an order of magnitude more correlated with cryptocurrencies. Why is that?

It's a combination of factors. Mechanically, as the dollar rises, it becomes more expensive to extract income from other currencies through stablecoins, reducing the demand for cryptocurrencies.

But more importantly, the value of the dollar is a bellwether for many macro factors, from global risk appetite to monetary conditions to growth prospects to central bank actions, all of which affect cryptocurrencies.

In other words, even if DXY itself does not "cause" price changes in cryptocurrencies, it is a summary indicator for many other factors. This is akin to the idea of "dimensionality reduction" in data science, if you will.

So if you want to know how your cryptocurrency wallet is likely to perform in the short to medium term, it's useful to look at valuation trends in the U.S. dollar and what's driving them.

Driver 1: THE US current account

Your college economics textbook says that if a country imports more than it exports (i.e., its current account deficit, roughly), its currency should fall in value.

In fact, the US current account has deteriorated since the COVID-19 pandemic, while the value of the dollar has declined.

But the post-pandemic economic recovery is slowing, and government spending is shrinking. Less import demand --> The annual current account deficit declined in the current year. Support dollar value.

So, dollar bulls: score 1; Dollar Bears: Score 0.

But in practice, the current account has little impact on the dollar compared with other currencies because so many goods are priced in dollars. In an over-financialized world, financial markets have a greater influence on the value of the dollar, which leads me to think:

Driver 2: US capital inflows

The US is a net recipient of portfolio investment inflows. Inflows into BUYING US assets --& GT; Supporting dollar demand.

Increasingly, that money has found its way into the U.S. stock market, which has far outperformed most other markets and attracted investors from around the world.

But as you know, with Fed tapering just around the corner and an economic slowdown that may have already started, stocks got hammered. A prolonged bear market has prompted investors to look for wider pastures. Money leaving the US market -- Demand for the dollar falls -- > The value of the dollar fell.

Whether we will see a general decline in stocks is debatable. But since there is no hard evidence to the contrary, we believe it will happen.

So now: DOLLAR bulls: Score 1: DOLLAR Bears: score 1.

Driver 3: The Fed raising rates

The prolonged low interest rate environment in the US has encouraged carry trades - borrowing dollars at low rates to buy higher-yielding foreign assets. This is an important driver of the increasing foreign assets held by U.S. banks and other financial entities.

Unless your cost of dollar funds rises, this is a foolproof investment. Raising interest rates - & gt; Less profit from carry trading --> Portfolio outflows from the US declined. Demand for the dollar rises -- > A rise in the value of the dollar -- > Carry trades are less profitable -- > A self-reinforcing reflexive cycle.

But as you can see in the chart below, the chart projects the DXY's response to interest rate shocks (2010 to 2021), with rate hikes (left) having less impact on dollar appreciation than rate cuts (right) on dollar depreciation.

In other words, the effect is "you go up, I go down". This is in stark contrast to the effects of QE/tapering, as you will see in a moment.

For now: DOLLAR bulls: Score 2; Dollar Bears: Score 1.

Driver 4: Quantitative tightening by the Fed

The impact of fed asset purchases is similar to raising interest rates. QT (Quantitative tightening) -> Dollar up, QE - > The dollar fell. But its impact is stronger because it directly affects market liquidity and the far end of the yield curve.

Historical data show that QT effects that cause the dollar to rise (right) tend to be much stronger than QE effects that cause the dollar to fall (left).

At face value, QT's impact on the dollar lasts about 10 months before fading. This means that if this year's QT starts in July, it will push the DOLLAR stronger until May 2023.

Anyway, now we have: dollar bull team: score 3; Dollar Bears: Score 1.

The DOLLAR bulls are winning, and in fact have been since Last May, while the power of cryptocurrencies is being weakened. (The dollar rose, cryptocurrencies fell.)

Ukraine provided another boost for DXY. At its current pace, this thing is on its way to passing 100 -- a long-term resistance -- in six months.

But will it be that smooth in the coming months? I remain skeptical.

Let's not forget that neither rate hikes nor QT have started yet. The Growth of the Fed's balance sheet, though slowing sharply since Last May, is still growing, and markets are by no means illiquid.

Yet everyone is trying to stay ahead of the Fed. The NASDAQ is down 20% from December to its low this month, cryptocurrencies are over 40%, and neither the rate hike nor QT has yet been justified by actual market conditions.

I expect a strong market rally sometime between now and July, which should be the latest for QT to start. (Rate hikes are small, QT is big.)

That means BTC's dominance could yet fall again by June.

Depending on the situation in Ukraine, the QT plan could change. Markets will be happy if it is delayed to cushion the economic blow from oil prices, but probably not for long.

In any case, my view is that the short to medium term market rallies with increased volatility down, but by the end of the year, QT has started, DXY has moved further up and crypto has moved further down.

But, all in all, let's not lose sight of the big picture. The dollar has been on a long-term downward trend for more than 30 years. Why is that?

There are many reasons, but ultimately it comes down to supply and demand. If the supply of dollars exceeds the demand, the price must fall. I am not just talking about the supply of the dollar itself, but also the supply of other things that are in effect substitutes for the dollar, for example, United States government securities.

Treasurys and other debt securities are increasingly being viewed by investors as money, a medium through which value is exchanged and stored. This trend is underpinned by the suppression of volatility by central banks, which helps to keep the value of these "quasi-currencies" stable.

This means that the actual money supply should be M1, M2 and other statistics, plus the stock of public debt in circulation. This real money supply is now twice the official M2 and growing faster, thanks to the us government's growing debt.

Assuming the demand for money remains stable, to see which way the value of the dollar will go in the long run, you need only ask yourself:

1) Will the trend in public debt reverse?

2) Will more and more things other than the dollar be used as a global currency?

My answer is 1) no and 2) yes. As populations age and automation, government spending must increase, which means more debt, which means more quasi-currency issuance. As for global currencies, I don't know, but I've heard there's something called cryptocurrency.

TLDR:

The value of 1/ USD is closely tied to cryptocurrencies and the dollar is rising -- >. Cryptocurrency falls

2/ DOLLAR should appreciate this year

3/ Qt-led dollar appreciation lasts about 10 months

4/ Expect a short to medium term MKT rally, but an appropriate bear market later in 2022

5/ In the long term, the dollar is on a downtrend