Crypto Index Tracker: Macro Muddies the Water
- By Dalvir Mandara
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- 4 min read
Crypto markets had long cared about macro markets, showing correlations with US yields, equities, and even commodities (Chart 4). However, since the recent crypto meltdown, that relationship is changing.
Bitcoin’s 30-day rolling correlation with the US 2Y is now negative (-32%) while it has dropped with the S&P 500 (20%), NASDAQ 100 (36%), and Brent Crude (10%; Chart 4). The only substantial correlation is with the US 10Y (-67%).
Still, two macro themes are important to watch.
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Crypto markets had long cared about macro markets, showing correlations with US yields, equities, and even commodities (Chart 4). However, since the recent crypto meltdown, that relationship is changing.
Bitcoin’s 30-day rolling correlation with the US 2Y is now negative (-32%) while it has dropped with the S&P 500 (20%), NASDAQ 100 (36%), and Brent Crude (10%; Chart 4). The only substantial correlation is with the US 10Y (-67%).
Still, two macro themes are important to watch.
First, energy prices are on fire with UK consumers the latest to feel the heat. Here, in the UK, Ofgem has updated its energy price cap; an 80% increase brings the average household energy bill to £3,500/per annum! More worryingly, household energy bills could reach £5,400/per annum in January and £6,600 in April. The negative sentiment around this could further harm crypto.
Second, Chair Jerome Powell and the rest of the Federal Reserve Board are determined to bring inflation back to target, and American markets are scared. We think they likely raise the Federal Funds rate to at least 4%, which, in turn, would provide a dose of weakness to equities and front-end rates – two markets crypto used to care about (Chart 4).
For now, though, crypto markets are in their own world. While the S&P 500 is flat over the past five days as markets anxiously await Jackson Hole, bitcoin is down 7% WoW. Elsewhere, our Metaverse (-4% WoW) and Privacy indices (-2% WoW) saw smaller losses, while our Smart Contract (+0.0%) and Defi indices (+1% WoW) survived another week (Chart 2).
- Smart Contract Platform Index: Terra luna (+42.0% WoW) and eos (+17.7% WoW) kept the index afloat, despite solana’s best efforts (-10.8% WoW).
- DeFi Index: Similarly, terra luna held the index above water.
- Metaverse Index: Ultra (+13.6%) was the only positive note in a generally poor week for the constituents of the index.
- Privacy Index: The poor performers, led by verge (-10.7% WoW), outweighed the positive performers, led by decred (+9.6% WoW).
- Bitcoin: is down 7% on the week, extending the poor performance from last week.
What Are in the Four Indices?
Here are the indices in more detail:
- Bitcoin: the OG of crypto markets deserves its own category and is in many ways the true benchmark for any other crypto market.
- Smart contract platforms: after bitcoin, the big innovation was to have blockchains that were more programmable. These could host smart contracts or decentralised applications and have allowed the emergence of the metaverse and defi. Ethereum (ETH) is the most popular version of a smart contract platform. As well as ethereum, we also include some key competitors. The constituents of this index are: Ethereum (ETH), Cardano (ADA), Avalanche (AVAX), Solana (SOL), Fantom (FTM), VeChain (VET), Terra (LUNA), EOS (EOS), and Chainlink (LINK). We also include Polkadot (DOT) which allows interoperability between blockchains and the use of smart contracts via parachains.
- Metaverse: coins associated with the creation of a virtual space/digital world on the internet using a combination of augmented reality, virtual reality, and social networks. The constituents of this index are Axie Infinity (AXS), The Sandbox (SAND), Decentraland (MANA), Enjin Coin (ENJ), Aavegotchi (GHST), Terra Virtua Kolect (TVK), Ultra (UOS), Phantasma (SOUL), RedFOX Labs (RFOX), and Gala (GALA).
- Decentralised Finance (DeFi): financial services built on top of blockchain networks with no central intermediaries. This can be a broad category, so we narrow this down to platforms that focus on lending/borrowing, yield farming, automated market making and decentralised exchange tokens. The constituents of this index are: Aave (AAVE), Compound (COMP), Uniswap (UNI), Yearn.finance (YFI), Loopring (LRC), PancakeSwap (CAKE), Maker (MKR), 1inch (1INCH), Thorchain (RUNE), and Terra (LUNA).
- Privacy Coins: coins that obscure transactions on the blockchain to maintain the anonymity of its users and their activity. The constituents of this index are Monero (XMR), Zcash (ZEC), Dash (DASH), Verge (XVG), Horizen (ZEN), Beam (BEAM), Secret (SCRT), Decred (DCR), Keep Network (KEEP), and Dusk Network (DUSK).
Dalvir Mandara is a Quantitative Researcher at Macro Hive. Dalvir has a BSc Mathematics and Computer Science and an MSc Mathematical Finance both from the University of Birmingham. His areas of interest are in the applications of machine learning, deep learning and alternative data for predictive modelling of financial markets.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
Please add correlation of DXY to BTC – Strong DXY = weak BTC, weak DXY = Strong BTC. Inverse correlation