A New Framework for Observing Macroeconomic Trends in the Crypto Market👀

For institutions, the greatest allocation value of Bitcoin lies in its decoupling from US stock indices. Those who use methods analyzing US stocks to analyze Bitcoin trends will naturally find their approach inconsistent as the correlation between Bitcoin and US stock indices changes.

We need to find a new effective framework to analyze macro trends in the crypto market beyond just monitoring Trump's Twitter, Federal Reserve meetings, FedWatch interest rate options market pricing, and Powell's expectation management rhetoric.

Here, we primarily draw insights from the macro trend analysis article of the crypto market by @CryptoHayes and summarize a new observation and analysis framework.

1⃣ A hypothesis we must believe: Bitcoin is a hedge against the entire US dollar system, and its price reflects the entropy of the dollar system. The more chaotic the internal dollar system is, the better Bitcoin's price performance.

2⃣ How to calculate the entropy of the dollar system?

-- Main factors for the entropy of the dollar system

10-year Treasury yield = the actual market interest rate of the dollar, changes in the Federal Reserve's balance sheet = outcome curve of US quantitative easing/tightening, 10-year Treasury yield + changes in the Federal Reserve's balance sheet = quantitative indicator of US monetary policy;

US Treasury TGA account balance = quantitative indicator of US fiscal policy;

The rate of change of the 10-year Treasury yield + changes in the Federal Reserve's balance sheet + changes in the US Treasury TGA account balance are the three main factors for calculating the entropy of the dollar system.

-- Specific calculation of the entropy of the dollar system

1. Standardization; 2. Use PCA method to determine the weights of the three main factors; 3. Calculate the distribution entropy based on information theory;

3⃣ Establish a quantitative relationship between Bitcoin and the calculated entropy of the dollar system

The price of Bitcoin is positively correlated with the entropy of the dollar system. In other words, the higher the entropy of the dollar system (S), the higher the price of Bitcoin (P).

Mathematical expression: We can assume that the price of Bitcoin is a function of entropy, for example:

where (k) is a proportional constant.

Simple linear relationship: P = k⋅S, where k is the proportional constant reflecting Bitcoin's price sensitivity to changes in entropy.

A more realistic nonlinear relationship: P = k⋅S^a, where a is an exponent reflecting Bitcoin's price sensitivity to changes in entropy.

That's all.