To demonstrate the efficacy of macro signals in navigating digital asset markets, I constructed a composite basket of macro indicators. I began by selecting some typical macro market rates, specifically front-end interest rates, inflation-adjusted interest rates , U.S. dollar exchange rate baskets, and U.S. corporate credit spreads. It’s worth mentioning that these rates are typically used within broader indices that are widely watched.
With a newly constructed macro indicator data series in hand, I conducted a hypothetical backtest to assess the usefulness of a macro signal in dynamically allocating to cryptocurrencies. Bitcoin was chosen as a proxy for crypto assets due to its status as the oldest and consistently largest token in the market by market cap, and I used theI combined the macro signal with a 50% allocation to bitcoin to create a long-only dynamic strategy, with the Bitcoin weight varying from 0 to 100%.
Over the five years of the hypothetical backtest period, it’s clear that keeping an eye on macroeconomic conditions can help reduce risk and improve risk-adjusted performance versus a buy-and-hold bitcoin approach.
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