How Understanding Macroeconomics Helped Me Make Better Investment Decisions

A Look at the Markets: Bitcoin

Bitcoin has been trading in a broad range since the beginning of March. The Bitcoin halving was in the middle of April.

What will the second half of the year bring for Bitcoin?

Improve Your Financial Decisions with Macroeconomics

What is Macroeconomics?

Macroeconomics, sometimes shortened to just ‘macro’ in the finance industry, is a branch of economics that focuses on the behaviour, performance, and structure of the overall economy at national, regional and global levels. In macroeconomics, the primary focus is on key economic indicators such as GDP (Gross Domestic Product), inflation, unemployment rates, interest rates, and government fiscal policies.

Macroeconomics is ‘big-picture’ thinking. That means that macroeconomists will analyse medium to long-term trends rather than on a day-to-day basis. They will also think about cyclical fluctuations in the market called the ‘economic cycle’ or ‘business cycle’.

What is the Business Cycle?

The business cycle refers to fluctuations in economic activity that an economy experiences over time. Typically it is characterised by:

• Expansion - increasing economic activity, lower unemployment, increased consumer confidence

• Peak - the economy reaches its maximum output with high levels of employment

• Contraction (possible recession) - decline in economic activity, increase in unemployment, decreasing consumer confidence

• Trough - the economy reaches its lowest point with reduced output and high unemployment

How Does This Knowledge Help Financial Decisions?

Let’s look at a recent example. At the beginning of 2020, much of the world economy was in full or partial shutdown due to Covid-19 restrictions. Many people may have assumed that stock indexes such as the S&P500 would decline due to many businesses (not all) not being able to manufacture products or sell to customers. Let’s look at what actually happened.

Looking at the chart above, we can see that, indeed, there was an initial shock as much of the world went into lockdown. However, as soon as the end of March 2020, there was a steady rise in the S&P500 index all the way until December 2021.

It is my belief that this can be explained by looking at macroeconomic factors. In particular:

• Fiscal stimulus - this is the money that governments gave businesses and individuals to support the economy when many people could neither work nor spend

• Monetary policy - governments around the world initially lowered interest rates and injected liquidity into the economy (called quantitative easing). (In recent years interest rates rose to control inflation).

• Transition to remote working - businesses and employees quickly adapted to remote working to allow economic activity to continue

• E-Commerce - consumers quickly turned to online shopping to boost sectors such as technology and logistics (home delivery)

Putting this into Practice

Investors should constantly look at and think about macroeconomic factors to give them confidence when investing in the financial markets. There are many resources online that provide figures such as GDP, unemployment, interest rates etc. Don’t just look at your own country. A lot of what happens in the world is led by the economy in the USA.

Why was Trump’s Attempted Assassination Bullish for Bitcoin?

There was an assassination attempt on former President Trump last weekend. Whatever side of the political spectrum you are on and we can all agree that we do not want to see this in politics. It is impossible to mention this without thinking about the people who were killed or injured.

What might be surprising to some is how this attempted assassination affected the price of Bitcoin. Bitcoin increased by 5.7% on the Monday after the failed assassination.

The markets assumed that the attempt on Trump’s life would improve his election chances in the November Presidential Election. The Republicans and Trump are considered to be more pro-crypto than the Democrats. Trump, for instance, is taking political donations in Bitcoin.

In my view, the adoption rate of Bitcoin and other cryptocurrencies is so rapid (fast) that most political parties around the world will have to support crypto if they want to win votes from prospective voters.

Nothing here is meant as an endorsement or otherwise of the Republicans and former President Trump. When supporting candidates you must think about all their policies.

Crypto Corner - Crypto is Macro!

Following on from our discussion of macroeconomics, founder and CEO of Realvision, Raoul Pal, maintains that now ‘crypto is macro’. This means that Raoul thinks that the price of the biggest cryptocurrencies such as Bitcoin and Ethereum will be dictated by the macro factors discussed in the first section of this newsletter.

Let’s examine why Raoul may hold this view:

• Liquidity - just like in the equity markets, the price of Bitcoin may well be connected to global liquidity. When there is an increase in global liquidity, the price of Bitcoin also increases but with increased volatility.

• Store of value - many investors are worried about the debasement of currency (when the purchasing power of your fiat currency decreases over time). These investors are looking for alternative stores of value such as Gold and increasingly, perhaps, Bitcoin.

• Financial infrastructure transformation - Bitcoin and the underlying technology, blockchain, has the potential to improve aspects of the financial system including payments, settlements, record-keeping and transparency.

• Network effects - the network effect refers to the phenomenon where the value and usefulness of a network or platform increase as more and more users join and participate. Telephones became increasingly useful as more people got them. Similarly with the internet.

Can we capitalise on this?

If this is true, can we capitalise on this? Let’s look at some history.

I remember the birth of the internet. At the time there were plenty of sceptics and non-believers. There is no need to go into detail here but some reasons were:

• Privacy and security

• Complexity - it was hard to access compared to today

• Negative economic impact

• Digital divide - not everyone would be able to access it affordably

• Lack of regulation

Less than 40 years later, you are all reading this newsletter because of the internet and most of us would find our lives hard to imagine without it.

How does this relate to cryptocurrencies?

Perhaps you can see some links between the birth of the internet and the birth of cryptocurrencies?

I was an early adopter of the internet and I was the first business in my sector to create a website. However, I only used the internet as a tool to enhance what I was already doing. Jeff Bezos took his belief in the internet to a whole new level when he founded Amazon.

Not all of us were capable of founding multi-billion dollar companies such as Amazon. However, if we believe that Raoul Pal is correct, and crypto is macro, we can all participate in the potential adoption of cryptocurrencies just by buying the most important tokens, such as Bitcoin and Ethereum.

Thinking about macroeconomics and adoption makes this type of decision easier. Of course, macroeconomic factors can change and must be constantly monitored.

None of this is financial advice. You must make your own financial decisions based on your personal risk tolerance, financial goals and personal circumstances.