LUCIDA: Unveiling the Crypto Macro Analysis Methodology of Top Researchers

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Zheng @ZnQ_ 626

  • LUCIDA Founder

  • 2019 Bgain Digital Asset Trading League Season 1 Mixed Strategy Group Champion;

  • 2020 TokenInsight Global Asset Quantitative Competition, runner-up in April, champion in May, and third place in the composite strategy group;

  • 2021 TokenInsight x KuCoin Global Asset Quantitative Competition, third place in the compound strategy group season;

Vivienna @VV_watch

  • BuilderRocket Accelerator Research Partner

  • Joined the industry in 2017

  • ex Foxconns blockchain investment fund conducts investment research

  • ex Huobi Defi researcher

  • Obsessed with macro research

HighFreedom @highfree 2028

  • Entered the industry in 2016

  • Computer Finance Composite Background

  • Currently a researcher at a securities firm

  • Good at cycle timing based on US dollar liquidity analysis and macro analysis

Albert @assassinaden

  • Quantitative Private Equity Fund Manager

  • Former quantitative researcher in the foreign exchange market, doing statistical arbitrage and relative value strategies

  • Expert in non-delta strategies and macro research

  • Emphasis on the ability to cope with cycles and survive bull and bear markets

Unveiling the Macro Analysis Framework


With the development of the Crypto industry, the correlation between the market and the macro economy is getting higher and higher, and the macro economy is becoming more and more necessary for analyzing the market. Today, I would like to talk to you about topics related to the macro economy. We will start with the first question, that is, please share your own framework and methodology for analyzing the macro economy, as well as the underlying logic.


The macro analysis for crypto consists of two parts: the first is the over-the-counter (non-crypto native) macro analysis, and the second is the on-the-counter macro analysis (crypto native, the core is BTC chain data analysis)

For the first type of over-the-counter macro, my analysis framework is a bit like an inverted triangle, divided into three levels.

The first layer is a variety of data , such as employment, GDP, inflation, PCE, etc.

The second layer is to summarize the data . The data in the first layer may seem messy, but in fact we can divide all kinds of data into two categories: economic data and inflation data. Because the ultimate goal of the Federal Reserve, which formulates monetary policy (raising and lowering interest rates, shrinking and expanding the balance sheet, etc.), and the Treasury Department, which formulates fiscal policy (how the government spends money, etc.), is to maximize employment and stabilize prices. In other words, the core goal of these two institutions is to ensure that the economy is good enough and inflation is controllable.

The third layer is the specific composition of US dollar liquidity and its future expectations . The main components of US dollar liquidity include bank reserves, the Federal Reserves balance sheet, the Treasurys balance, and the balance of overnight reverse repurchase accounts. We need to pay attention to the changes in these factors, as well as the refinancing announcements issued by the Treasury every quarter, to judge the current and future US dollar liquidity.

Moreover, the two core factors of employment and prices influence each other to some extent. For example, the Federal Reserve will consider both employment and inflation data when deciding whether to cut interest rates or stop shrinking its balance sheet. Therefore, we need to conduct a comprehensive analysis of these data to more accurately predict changes in US dollar liquidity. Through quarterly refinancing announcements and various economic data, we can better understand the operations of the Treasury and the Federal Reserve, and thus predict the future trend of US dollar liquidity.

These are the so-called off-market factors, which mainly refer to those that are not native to cryptocurrencies, such as the aforementioned macroeconomic indicators, policy changes, market sentiment, etc. Although these factors do not directly originate from the cryptocurrency market, their impact on the market is significant because they define the external environment of the market and investors expectations.

The second category is on-site macro: On-site macro refers to data and analysis directly from the cryptocurrency market, with the core being Bitcoin鈥檚 on-chain data. These data include changes in the amount of coins held by long-term and short-term holders, profit levels, etc. By analyzing these on-chain data, we can gain a deeper understanding of the dynamics within the market, including investor behavior and market trends.

These two sets of analysis methods have their own focus. The off-market factors provide us with a macro perspective, while the on-market factors allow us to gain insight into the cycles and rhythms of the crypto market. When analyzing the cryptocurrency market, it is very important to combine these two perspectives, which together form a comprehensive macro analysis framework.


I would like to add that in addition to the policy impact of the Federal Reserve and the Treasury, we should also pay attention to microeconomic factors such as bank deposits. For example, ordinary investors may choose to deposit their funds in banks to earn interest when faced with high interest rates, but this may also have an impact on market liquidity. Historically, the growth rate of deposits slowed significantly after the banking crisis in the 1980s and 1990s. After the SVB incident in 2023, we saw a similar situation, with bank deposits declining while stock markets and other asset markets began to resume growth. In addition, international liquidity, such as the Bank of Japans Japan-US carry trade, also brings additional liquidity resources to the market.

In a high interest rate cycle, people tend to deposit their money in banks to earn interest . However, when banks face operating risks, investors may turn their funds to the stock market or other assets, such as short-term Treasury bonds. Currently, the yield on short-term U.S. Treasury bonds is close to 5%, which attracts many investors. At the same time, investors may also choose to invest in stocks, derivatives or ETFs, etc., in order to seek higher returns.

Of course, when facing a banking crisis, investors may re-evaluate the safety of depositing funds in banks. They may choose to invest their funds in the stock market or other assets to seek relatively safe returns. This happened in the 1990s and 2019. In addition, the performance of money market funds can also be used as an indicator of liquidity. Starting in 2023, the growth rate of money market funds reached a new high in more than 20 years, reflecting the markets demand for liquidity.

Ideally, we should consider all factors that may affect the market, including liquidity conditions in other countries. However, in practice, we may not be able to include all factors in the analysis due to the difficulty. For example, carry trade in Japan and Europe has an impact on the market, but it is difficult to quantify. We usually focus mainly on the United States and consider the impact of other countries as secondary factors. Nevertheless, we cannot ignore the impact of the overseas offshore dollar market.


On Twitter, I published an article exploring the impact of US liquidity on cryptocurrency prices. I focused on domestic factors rather than overseas US dollar markets, as data on the latter is difficult to quantify. When analyzing Bitcoin prices, I divided its influencing factors into three categories:

The first is observable indices : including the federal funds rate, Treasury yields, the US dollar index, and gold prices. These indices are the basis of market expectations, but their relationship with risk asset prices is not directly linear. For example, interest rate hikes usually lead to tighter market liquidity, which is not conducive to the rise of risk assets, while interest rate cuts have the opposite effect. However, this impact is complexly superimposed by the monetary policy transmission mechanism, economic, financial, and sentiment cycles, and will not have a direct impact on market liquidity at the moment of monetary policy implementation.

The second is liquidity indicators : such as the Feds balance sheet balance, reverse repurchase operations, and Treasury accounts. These indicators directly affect the liquidity of the US dollar, thereby affecting the prices of growth-oriented risk assets such as Bitcoin. For example, the Feds expansion of its balance sheet, the reduction of reverse repurchases, or the consumption of the Treasurys TGA account will increase market liquidity and benefit risky assets.

The third is the sentiment impact indicator : including dot plots, speeches by Fed officials, labor market data, inflation data, etc. These data have a short-term impact on market expectations and sentiment, affecting the small cycle of trading. But it is worth noting that traders should focus on changes in expectations rather than the data itself.

How macro factors affect the crypto market


So how do you apply your macro analysis framework to the crypto market? Or, how do these frameworks guide your trading and help you make money?


I think there are three ways to make money:

The first is to make money in the big direction : this means buying and holding spot when the big market trend is clear, not trading frequently, and being patient.

The second is to make money from volatility : this usually involves quantitative trading, taking advantage of market volatility to buy and sell without paying attention to the specific direction of the market.

The third is to make money from liquidity : during a bull market, invest funds in the market and earn high interest by lending to traders in need.

I personally believe that macro factors affect the cryptocurrency market in two main ways: liquidity and penetration. Liquidity determines the amount of funds in the market, while penetration is the proportion of funds allocated to cryptocurrencies such as Bitcoin.

In terms of operation, I tend to hold full spot positions during the bull market, especially mainstream currencies such as Bitcoin. This is the first type I just talked about: making money in the big direction.

At the same time, I will appropriately use part of the funds to go long on the currency standard, but avoid frequent long and short operations in the bull market. I think the key is to identify the highs and lows of the market, which requires comprehensive consideration of multiple information sources, such as miners costs, market heat, lending rates, funding rates, etc.

Market performance in the second half of 2021 shows that there is a chronological relationship between the highs of Bitcoin prices and the highs of the Nasdaq index and US dollar liquidity. This suggests that when liquidity peaks, risk assets may need to prepare for exit. Therefore, I will pay close attention to liquidity indicators to determine whether the market is close to a top or bottom.

At the same time, I believe that information orthogonality, that is, forming a comprehensive market judgment by widely collecting information from different angles, can help us grasp the highs and lows of the market more accurately, so as to make more reasonable trading decisions and minimize the possibility of operational errors. I will also adjust my risk control strategy according to market conditions to ensure that I can protect my investment when the market fluctuates.


I recommended a book on Twitter, Principles of Professional Speculation, in which the author Sperandi proposed two basic principles of market analysis and forecasting: one is that market trends are the result of the operation of basic economic forces , which are influenced by political systems and policy activities; the other is that the psychological state of market participants determines the manner and timing of price trends.

Macro analysis should focus on these two points. First, we need to understand the basic principles of politics and economics, such as economic indicators, production and consumption cycles, investment and savings behavior, and technological innovation and development paths. Second, the prediction of the psychological state of market participants is more instructive for trading. Macro analysis is often questioned because many people pay too much attention to economic and financial data and ignore expected changes. Successful trading requires not only analyzing the current situation behind the data, but also paying attention to how expectations change and how market games are conducted.

Soros once pointed out that economic history is built on false lies, not truth. The way to make big money is to analyze false trends, follow the trend, and get out before being exposed. This reflects the above principle, because to distinguish false trends, you must first know what is right. For example, if the government adopts a high interest rate policy during a recession or tries to stimulate the economy by adjusting interest rates through monetary policy, if you do not understand the transmission mechanism of these policies, you will not be able to judge their consequences, nor can you get out before most participants find the problem.


Regarding how the macro analysis framework affects the cryptocurrency market and our trading strategies, I will explain it in the following points:

First, since 2020, we have discussed a long-standing theory – the liquidity chain theory. Based on risk analysis, we sort different assets such as commodities, foreign exchange, stocks, etc. into a chain. At the top of the chain is cash. As the basis of all assets, cash has extremely low risk, almost zero except for inflation. If cash is at risk, it means that the global market may face a reset.

The second layer of the liquidity chain is bonds, especially government bonds, which are basic fixed income assets and are considered low-risk assets. The third layer is corporate bonds and stocks because they offer relatively higher returns. The fourth layer is commodities, which have higher volatility and risk. The last layer is cryptocurrencies because they are at the end of the liquidity chain and have the highest volatility and risk.

This theory also explains the underlying reason for the phenomenon mentioned by Highfreedom just now: There is a chronological relationship between the highs of Bitcoin prices and the highs of the Nasdaq index and US dollar liquidity.

When liquidity is released, the first thing that is affected is the foreign exchange market, then the bond market, then the stock market, the commodity market, and finally the cryptocurrency market. On the contrary, when liquidity is tightened, the withdrawal process is reversed. This order of liquidity flow has an important impact on the market.

As traders, we use this framework to guide our trading. For example, when we see liquidity start to tighten or release, we can predict the markets reaction and adjust our trading strategy accordingly. We pay close attention to interbank interest rates and bond futures because these are the first reactions of the market to policy changes. Then, we analyze the options market because option prices reflect the markets expectations of future volatility.

Our trading strategy is mainly based on these macro expectations. For example, in the interest rate hike cycle, market sentiment tends to be bearish, and we will configure put options when volatility is low. At the same time, we will adjust our option portfolio according to market sentiment and expectations to earn returns from volatility regression.

Our strategy relies on volatility returning, especially near-term volatility. Far-term volatility may remain high for a period of time and will not return immediately. Therefore, we are usually on the buy side of the far side and capture value through inter-period allocation. Our combined strategy is to earn the difference in value between near-term and far-term options by holding them.

Bitcoin鈥檚 position in the asset class


The next question is relatively easy, and we have already indirectly mentioned it in previous conversations, which is the position of Bitcoin in traditional assets. I remember that in 2019, especially in the first half of the year, the market generally regarded Bitcoin as a safe-haven asset. At that time, due to some geopolitical crises, the price of gold soared, and Bitcoin also rose accordingly. At that time, the markets recognition of this view was increasing.

However, with the bull cycle from 2020 to 2021, and what is happening in 2022, the public is gradually accepting that Bitcoin is a riskier asset than traditional risk assets. I would like to know if you agree with this positioning, or if there are other descriptions of Bitcoins position in the big assets.


I think this description is quite accurate. I think Bitcoin is undoubtedly a riskier asset in the short to medium term. But in the long term, I am confident that Bitcoin can develop into a safe haven asset. Currently, we are in the process of Bitcoin growing into a safe haven asset. I think there are several basic elements that a safe haven asset needs to have, and we can discuss whether these are necessary conditions:

The first is that the market size must be large : the market size of the asset needs to be large enough so that large amounts of money can flow in and out freely.

The second is that volatility needs to decrease : Although Bitcoin has historically been very volatile, it has now dropped significantly, approaching or sometimes even lower than the volatility of gold.

The third is the rationality and stability of market participants : as market participants gradually transform from insiders to more traditional and rational financial institutions, the market is likely to become more stable.

When these conditions are met, Bitcoin could become a full-fledged safe-haven asset with a large market size and low volatility, similar to gold. At that point, even major events would only have a minor impact on the price.


I think Bitcoin is called digital gold, and the logic of its comparison with gold is widely recognized. The total amount of Bitcoin is fixed, similar to the scarcity of gold, and it can be used as a store of value and a means of payment, which is highly consistent with the characteristics of gold.

However, the pricing of gold prices is a complex issue. When risk aversion is high, such as during war, the safe-haven nature of gold is particularly evident. If the underlying liquidity of the market is not tight, but the war factor is significant, Bitcoin may follow the trend of gold at this time, because the main factor affecting the price of gold is risk aversion. Correspondingly, the price of Bitcoin will also be affected by risk aversion.

However, if the underlying liquidity of the market itself is insufficient, such as when the global or US economy enters a recession cycle or there is an expectation of recession, even if risk aversion is high, it will not drive trading volume. This explains why other markets do not react significantly when certain geopolitical conflicts are intense. In this case, it is the underlying liquidity that determines the bottom line of the price, and Bitcoin is closer to risky assets.

Therefore, the correlation between gold prices and Bitcoin prices mainly depends on the markets basic liquidity at the time and the markets view of Bitcoins attributes. Most of the time, Bitcoin prices are highly correlated with US stocks. In the process of economic contraction, investment contraction, and deleveraging, Bitcoin will react first, and when the economy recovers and investment returns to leverage, it will also react in advance, and its acceleration will be greater.

Gold holdings are usually kept below 5% in global asset management companies because the factors affecting gold prices are very uncertain. Although gold has practical applications, it is more affected by speculation and emotions and lacks fundamental analysis. This makes it difficult to explain to LPs (limited partners) why they should invest in gold. They can only be based on predictions of future economic recessions or risks, which is very subjective and difficult to be convincing.

Bitcoin faces the same problem, and it is difficult to convince capital companies and LPs to allocate funds to this asset. Although gold is regarded as a safe-haven asset, its ability to fight inflation is mainly reflected in the long term. The same may be true for Bitcoin, and its status may be very high in the future, especially as the difficulty of Bitcoin mining increases.

If more traditional financial asset management companies enter the Bitcoin investment field, the investment proportion of Bitcoin may move closer to that of gold.


From a macro perspective, gold and Bitcoin have multiple attributes. They can be both risky assets and safe-haven assets. This phenomenon may seem contradictory at first glance, but it actually has its own internal logic.

First, both gold and Bitcoin are safe havens for funds in times of crisis. During war or other turbulent times, asset transfers are restricted and liquidity seeks safe havens. Investors tend to transfer funds to assets that are easy to cross borders, such as gold and Bitcoin. This leads to a sharp rise in the prices of these assets during times of crisis.

However, in stable market periods, the properties of gold and Bitcoin are different. Bitcoin is more of a risky asset due to its high volatility. Its price fluctuations are related to the stock market, partly because the Bitcoin market has more leverage instruments and many market participants, resulting in its volatile prices.

In a stable environment, investors tend to pursue a stable portfolio and avoid large fluctuations in asset prices. Therefore, they may prefer to allocate some traditional assets, such as gold and other commodities. Gold is usually controlled within 5% of the portfolio due to its long history and stable value.

In addition, the prices of gold and Bitcoin are also affected by market expectations. When liquidity is sufficient, investors may seek higher-yielding assets, while when liquidity is tight, they may return to traditional safe-haven assets.

Finally, the status of Bitcoin and gold as safe-haven assets also depends on the market environment and the stage of the macroeconomic cycle. In certain situations, they may show safe-haven characteristics, while in other situations, they may be more of a risk-on asset.

What are the key points of macro analysis?


Next, lets discuss a question: when analyzing macroeconomics, what data sources do you usually rely on? Do you collect data yourself, or do you have some non-traditional analysis tools? Do you have any more exclusive information sources to share?


I wrote a little code on TradingView to make a dashboard to continuously monitor and analyze macro liquidity. These tools are no different from the data provided by the Fed and Treasury official websites, but I integrated them into a single interface for continuous monitoring. In addition, I also follow some analysts on Twitter, especially a Taiwanese blogger who aggregates some interesting data, such as lending rates on different exchanges. This data can reflect the operation trends of large and small investors, as well as the order between them. I think this data is very valuable, but I have not successfully applied his tools.

I have also been looking for data on US Treasury bonds, especially the daily net issuance of short-term and medium-term long-term bonds (net issuance is the amount of new bonds issued on the day minus the amount of bonds maturing on the day). These data are very important for understanding and judging the market liquidity at present and in the next period of time. At present, I can only manually download the data from the US Treasury website and process it myself. If you know a better data source, please recommend and contact me.


I would like to add some macroeconomic data sources that we follow. Since I focus on risky commodities, the data services I use include Spotgamma Menthor Q, which provides data on US stocks, bond markets, and other commodity options, which is quite comprehensive.

In addition, for the US stock market, there are services such as GR, which provide real-time data at a relatively cheap price. If you need more in-depth data, such as data on the gold or interbank market, you may need to rely on internal industry resources.

For the cryptocurrency market, the first recommended data source is Amber Data Derivative, which is very comprehensive and has obvious advantages in option data. In addition, this service provider provides real-time data from exchanges such as CME.

We also need to pay attention to the data of some exchanges, especially those with a large proportion of institutional trading volume, such as Deribit, where 80% of their trading volume comes from institutions and 20% comes from professional individual investors. Such data can reflect the expectations of market institutions and have a greater influence on the market.

In addition, exchanges like Bitfinex can be regarded as the interbank market of the cryptocurrency market. Their short-term lending rates can reflect the risk-free rate of the market, which is very important for calculating the risk premium of the crypto market.

Compliant exchanges such as Coinbase and their large-cap trading data are also important, especially dark pool trading data, which may have an impact on the market.

In general, although we can obtain a lot of market data, the final trading decision still depends on our own risk management ability. Our goal is to keep no loss or make a small profit in most cases, and make a big profit in a few cases.

Review and outlook of this cycle


Let鈥檚 turn to the last question, your view on the future market.

Let me share my opinion first: the general market expectation is that the Feds interest rate cut in the second half of this year or next year will bring huge liquidity, coupled with favorable factors such as Bitcoin halving, many people expect to replicate the bull market in 2021. However, I am very pessimistic about this generally optimistic expectation, because historically, highly consistent market expectations are often accompanied by huge potential risks.

Especially with regard to institutional investors such as US public funds, although they are long-term holding institutions, they also adjust their investment decisions based on market conditions and will not blindly chase highs.


My view is very similar. The main uptrend of the market this year started in November last year, especially after the spot ETF trading in January, the market has experienced significant fluctuations. In the first quarter, liquidity and penetration rates both increased, but mainly retail investors participated, and real institutional investors have not yet entered the market on a large scale. For example, 80% to 85% of the capital inflows into spot ETFs came from retail investors. Liquidity declined in the second quarter and penetration rates stagnated. My outlook for the third and fourth quarters is that I hope liquidity will remain stable and penetration rates will increase due to further participation of institutional investors.

I believe that raising or lowering interest rates does not change liquidity immediately, but rather changes the markets expectations of future liquidity. My question is whether there will still be a loose fiscal and monetary policy environment like in 2021, which seems unlikely at the moment. Therefore, I am cautious about the future performance of the market and hope that there will not be overly optimistic expectations.

The market may not change much in the short term, and liquidity expectations may lead to 4 to 5 interest rate cuts in the next 15 months, which provides the market with a solid expectation. But the real liquidity release will be slow, and large-scale rapid changes are unlikely. Unless there is a serious economic recession or crisis, it is unlikely that a loose fiscal and monetary policy environment will appear again.

Therefore, if there is no serious economic recession, it is highly likely that this rate cut may be a so-called asymmetric rate cut. Previous rate hikes and cuts were symmetrical. For example, it took 1 year for the federal benchmark interest rate to increase from a low level to a high level, and conversely, it took about a year to reduce it from a high level to a low level. This violent rate hike started from 0-0.25 in March 2022 to 5-5.25 in May 2023, which took a little more than 1 year. However, this rate cut may take an asymmetric route, and the rate cut process will be continuous and slow.


My conclusion is relatively simple and similar to everyone elses. From July to August this year to the end of the year, the market may face a less optimistic liquidity situation. Even if there is a rate cut, it may only be once, which provides positive expectations for the market but will not fundamentally change the status quo.

The economy is not in recession and the stock market may continue to rise. Peoples lives do not seem to be affected much, and deposits and dividends can still fill household savings and promote consumption. However, if inflation continues to rise, it may trigger trading expectations for a stagflation cycle. If high interest rates continue to be maintained next year, and even further interest rate hikes are needed in some cases, and the Ministry of Finance does not relax its policies, this may lead to tighter liquidity next year. This is definitely not good news for markets that rely on liquidity, such as Bitcoin.

As for the desire of institutional investors to enter the market on a large scale, I think this is more of an expectation than a reality. In the current situation of poor basic liquidity, insufficient market understanding of cryptocurrencies, and high volatility, it is unlikely that institutional investors will hold or build positions on a large scale. This expectation may be too idealistic, and the actual situation may not be as we wish.


Short-term market expectations are currently bearish, especially for Bitcoin. Although market volatility may increase in July due to factors such as option expiration, in the long run, the asset allocation cycle may drive prices higher. However, for the market to rise, it may need to rely on two factors: one is a large allocation from institutional investors, and the other is a further improvement in investor sentiment. But such sentiment-driven rises may not be healthy, as high funding costs and high volatility are difficult to sustain in the long term.

My view is that the market will be a slow process to rise, because the bookkeeping of market participants is a gradual process. The use of derivatives and leverage is difficult to drive the market in the short term. In this case, the operation of market makers may become an important factor affecting the direction of market prices. The macro factors of the market may only be a factor that drives the hedging behavior of market makers, rather than directly acting on prices. This may cause the market to look more irregular, increasing the difficulty of executing strategies such as CTA.

In general, the market may not experience a large-scale crash or rapid rise in the short term, but a slow and long process. Liquidity will not experience large fluctuations unless there is a severe economic recession. Investors should remain cautious and pay attention to the allocation trends of institutional investors and changes in market sentiment.

This article is sourced from the internet: LUCIDA: Unveiling the Crypto Macro Analysis Methodology of Top Researchers

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