Crypto markets from an FX perspective

It’s fifty years since the Bretton Woods system collapsed. Given that I’ve been working in FX my whole career, I suspect I should be thankful to Nixon for that! There’s a great article by Chris Marsh which discusses this, and I strongly recommend having a read of it. Also recently I read an article by Brent Donnelly, discussing his takeaways from Camp Kotok, an annual gathering of market folks. It’s a very insightful article, and has a section giving Brent’s views about cryptocurrencies. Both articles got me thinking a lot more about the whole fiat and cryptocurrency debate.


Should we even be having this debate though? Are the true rivals of cryptocurrencies actually fiat currencies, or should we be discussing cryptocurrencies and gold? Gold has some use cases (funky sparkly jewellery, heatsinks in McLaren F1s and gold leaf on expensive burgers…), but for the most part it’s held for investment purposes and as a store of value that is seen as “independent” and it has limited supply. There’s no reason it should be worth anything, but for millennia, humans have valued this element in a way that other more “useful” elements like copper have not been valued.


Cryptocurrencies are also “independent”, well at least not those distributed central banks, and have a limited supply (although, people could of course gravitate towards other cryptocurrencies, in the same way that people could gravitate from gold to other elements, creating additional “supply”). Whether they are a store of value is more difficult to gauge, given their volatility which is significantly more than gold. Again, there is no reason this should be worth anything, like with gold, but in a sense that doesn’t matter, there is demand to purchase it, and supply is limited 


Brent argues that we should be looking towards macroflippening, a time when the market cap of cryptocurrencies exceeds that of gold, and flows are coming out of gold into cryptocurrency. Whilst it is hardly a statistical observation, it is noticeable how many crypto bulls on Twitter are not massive fans of gold, which seems to tally with Brent’s observation. In a sense, having “independent” cryptocurrencies as another proxy for gold would be more palatable for central banks. 


So if the analogy is more about gold and “independent” cryptocurrencies, it makes it easier for us to understand which factors to use to trade cryptocurrencies like bitcoin. Looking forward, if volatility does end up subsiding, maybe bitcoin will end up trading as an inverse of real rates? Looking at trading carry via the futures curve is another possibility. We can also think about other factors too, like trend or mean-reversion. We can also think about positioning and sentiment data to trade cryptocurrencies. At the same time, the differences can open up new possibilities, in particular given the plethora of data available for cryptocurrencies which aren’t going to be available for the gold market. Taking the idea of macroflippening further, what about trading it in a relative value way with gold too?


There are also differences in liquidity too, which we need to take into account. More broadly, using active trading strategies for cryptocurrencies, means we don’t need to necessarily have a long term view. I don’t really care where my 2 year forecast is for an asset, if my holding period is a few weeks for example.


Cryptocurrencies are clearly different compared to other asset classes, which can give rise to a lot of more philosophical long term questions about them. Yet they do bear some similarities to existing assets such as gold, which can help give us an insight into how to trade them. If we are trading them on a shorter term perspective, where bitcoin might be trading in a couple of years is of less relevance too, compared to forecasting where it might be in days or weeks. The above ideas are literally just that ideas, but they at least give us a starting point for further statistical analysis.