Crypto long and short: Bitcoin’s hedging potential

This week, Glenn Williams Jr. envisions one of the hotter debates in cryptocurrency at the moment: How traders should feel about bitcoin and ether possibly achieving a “golden cross,” a popular indicator from technical analysis.

Next, Todd Groth, head of index research at CoinDesk Indices, addresses how enormously bullish a wide range of assets have become, and where the Federal Reserve fits into this.

Many in the crypto-investment realm are excitedly worked up as bitcoin (BTC) approaches the vaunted “golden cross.” For those unfamiliar with this price charting technique, a golden cross occurs when a short-term moving average (often the 50-day) crosses over a long-term (often the 200-day).

It is a fairly common indicator often used by technical analysts, seen as an indication of a newly formed bull market. As a technician myself, the moving average crossover is certainly something I notice. Why is it thought-provoking? It puts the current moment into a larger perspective, and makes you ask, “What has changed in the short term to accelerate the price movement, and is it something I expect to continue?”

But how good is it as a forecasting tool? It’s one thing to identify a moving average and say, “This is bullish.” It is quite another to see if it actually has been.

Examining the history of bitcoin, what stands out to me the most is how few times a golden cross has occurred. Since January 1, 2015, there have been only six instances where the 50-day exponential moving average (EMA) crossed above the 200-day EMA. (Exponential moving averages give more weight to recent prices, while simple moving averages weight all data points equally. The use of one versus the other is a matter of personal preference.) That’s even more rare for Ethereum’s ETH, which has experienced just three golden cross since 2017.

But both are close to doing so again, with BTC 2.4% away from one and ETH 2.1%. The point of looking at them now is to find out if the assets are approaching something worth paying attention to, or if it is simply something to talk about. The results are interesting.

Following the previous 50-day/200-day golden cross, BTC continued to gain 4.4% in the following seven days and rose 9.6% in 30 days. However, you cannot look at these returns in isolation. What is BTC doing on average over all seven and 30 day periods? Worse than just after golden crosses, adding 1.6% and 7.5% respectively, it turns out. There is actually an advantage historically when the moving averages cross each other.

The best 30-day return occurred when BTC surged 67% in April and May 2019 following a golden cross. The worst period was the loss of 18.2% in May and June 2018.

For ETH (the second largest cryptocurrency by market capitalization, only behind BTC), golden crosses have not been a bullish indicator. Average seven- and 30-day results were losses of 2% and 8%, respectively. A buy-and-hold strategy has made much more sense for ETH than simply going long the asset based on a moving average crossover. This statement is strongly informed by ETH’s average performance over all seven- and 30-day spans: gains of 1.5% and 7.3%, respectively.

Surprisingly to me, golden crosses have also been quite rare in more traditional asset classes. For example, I looked at three major US stock market indexes: the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite. The S&P 500 has seen three golden crosses since the start of 2015, while the other two benchmarks had five. Each posted positive 30-day returns in the aftermath. The Nasdaq led the way with 1.5% while the S&P 500 returned 1.15% and the Dow was up 1.13%. I would argue that none of these returns are worth getting overly excited about.

But to take a step back, it is striking that for four of the five assets considered (all but ETH), gains were positive 30 days after a golden cross. Over time, I think it makes sense to apply the same process to a wider range of cryptocurrencies to identify patterns, if indeed they exist.

Frankly, I struggle with the meaning of the golden cross for cryptographic debates around causation versus correlation. I am also of the opinion that the traditional 50-day/200-day moving average time frame may have more applicability in traditional finance than in this new frontier for digital assets. Time and testing will tell. And finally, I have to question whether the rarity of the cross means it deserves extra attention—or none at all. I think the truth is somewhere in the middle, with the overall message being that no single indicator should be viewed in a vacuum.

After the carnage of 2022, those not paralyzed by shell shock seem extremely bullish and loving it. The CoinDesk Market Index (CMI), our broad cryptocurrency market benchmark, is up 40% in 2023. Bitcoin (BTC) up 37%. Even Solana’s SOL is up nearly 150%, after falling hard in the wake of supporter Sam Bankman-Fried’s fall.

It’s not just crypto. Tesla stock (TSLA) is up nearly 100% from its lowest level a month ago. Meme stock favorite Bed Bath & Beyond ( BBBY ) soared even as the company faces potential bankruptcy that the company announced it would sell equity to raise needed cash. Ryan Cohen, a meme stock investor, is making moves again with Nordstrom (JWM) and Alibaba (BABA). Cathie Wood boldly declares that her ARK Innovation ETF (ARKK) is “the new Nasdaq” after rising 40% in January (while underperforming the Nasdaq-100 by nearly 80% over a five-year horizon). What is going on here?!?

It feels like markets have reverted to a 2021-style bullish mindset due to the US Federal Reserve slowing the pace of interest rate hikes. The front end of the US yield curve shows this. Just look at the yield difference between six- and 12-month T-bills; they are pricing in a Fed rate cut in the third or fourth quarter of this year. (The long-term returns are now higher than the short-term, which leads me to make that observation.)

After last week’s Federal Open Market Committee (FOMC) meeting, which resulted in only a 25 basis point interest rate hike, traders interpreted Chairman Jerome Powell’s relatively level-headed comments as an indication that the central bank will soon slow its efforts to curb inflation via hikes — something which fuels continued to buy momentum in the markets for anything and everything that wasn’t bolted down.

The so-called “bond king” and chief investment officer Jeffrey Gundlach of Doubleline Capital has noted that the Fed has historically set its policy rate based on tracking the two-year Treasury yield on a lagging basis. With the two-year yield crossing the effective federal funds rate, we see this leading indicator of future interest rate expectations calling for a cut. But the real question is the immediacy and timing of any reductions. So how soon is it now?

Digging into the last two rate hike cycles (see below), we can see that the two-year rate was below the Fed Funds rate for one year during the 2016-2019 cycle and two years during the 2004-2008 cycle. These two periods suggest higher prices for a longer time than the six months priced into the market.

Inflation expectations (as derived from Treasurys including inflation-linked TIPS) are coming down from their peak in 2021-2022, but remain above average levels since the financial crisis of 2008. This is good news, but should be taken with a grain of salt as the Fed itself has a significant share of the TIPS market (estimated at 25% in 2022, according to Jim Bianco), which can distort the signal sent by this indicator. Add last Friday’s unexpectedly strong jobs report, mixed with lingering concerns over the effectiveness of the Phillips curve, and you have conditions of considerable uncertainty that could force the Fed to wait and see before cutting interest rates to minimize the chance of a policy failure.

Put another way, we may be approaching the Fed’s peak pressure on the economy, but are still unsure how long the pressure will last. So far, the economy appears to be resilient and in good spirits, but the inflationary temper remains. The Fed doesn’t appear to have as strong a read on the economic pulse as it once did, which is confused by market distortions and supply chain reverberations caused by the coronavirus pandemic. We can only hope that the Fed clamps down on the economy if the patient suddenly collapses.

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