Crypto markets are a skilled trader’s playground. Fast trends, spiked reversals, and repeatable technical setups… make this market one of the most profitable to play in for those who know what they’re doing.
In this write-up, we’ll lay out how we at Macro Ops approach analyzing cryptocurrencies. We’ll breakdown what we call the Trifecta Approach. A system of analysis first used by Michael Marcus, a Market Wizard who turned $30k into $80mn back in the 80s. And the best part is that you don’t need any fundamental view on the efficacy of Bitcoin or Ethereum as a store of value, medium of exchange, or alternative currency. You just need to understand the analytical edge and apply it in a repeatable process.
To kick things off let’s turn to Marcus and his explanation of the Trifecta:
The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone. First, the fundamentals should suggest that there is an imbalance of supply and demand, which could result in a major move. Second, the chart must show that the market is moving in the direction that the fundamentals suggest. Third, when news comes out, the market should act in a way that reflects the right psychological tone.
Fundamentals, technicals, tone (sentiment). This is the foundation of our analytical process. Not just for crypto, but for any market we play. Every trade is triangulated through this lens. Doing so allows us to identify high expected value (EV) trade setups.
We’ll use Bitcoin as our example but this process works interchangeably for any crypto asset.
Fundamentals… this is what causes the large moves in markets so it’s key to understanding what they are and how they work.
Cryptos don’t have any cash flows or true intrinsic value. They’re similar to precious metals (gold and silver) in that way. As a result, it’s fundamentals are comprised of available flows and narrative adoption, which we can break down into 3 lenses. Let me explain:
01. Massive Demand vs. Supply mismatch: Consider this, the entire investable gold market (bars, coins, futures, ETFs, etc…) equals out to roughly $2.6trn. The market cap of bitcoin would have to rise 10x to match that. The fact that bitcoin’s share of global liquid markets is basically a rounding error, means that it will only take a small shift in crypto adoption to move the market dramatically.
02. Real Rates: Like gold, negative real rates are a big driver of bitcoin adoption. This is because negative real rates force investors further out the risk curve and make them more open to trying new alternative forms of assets, such as crypto.
03. Risk Cycle: Look at the chart of bitcoin against a basket of emerging market currencies below. There’s a tight correlation between the two and that’s due to good reason. Both cryptos and EMFX move off the ebbs and flows of the Risk Cycle, which is just a fancy term for the measurement of money contracting/expanding x investors cutting/adding risk. You can measure this through credit spreads, liquidity gauges such as the ANFCI, and flows.
Technicals… the crypto market is one of the best technical markets to trade. That’s because there’s a lot of newbies playing in crypto and they’re largely driven by fear and greed compulsory sentiment swings. This shows up in actionable and repeatable chart setups. We use 2 primary tools for analyzing bitcoin’s technicals
01. Market Regime: We use the SQN indicator that was first popularized by Dr. Van Tharp. It measures the day to day difference between closes averaged over a 100-day period. It then classifies the market into 5 different market regimes (Bull Volatile, Bull Quiet, Neutral, Bear Quiet, Bear Volatile) according to trend direction and standard deviation (volatility). For more on how to use this indicator, read here.
02. Compression to Expansion Regimes: All markets oscillate between low volatility (compression) to high volatility (expansionary trends). This is especially true in crypto markets. You can use classical charting to identify congestion zones and breakout setups or you can use measures of volatility such as Bollinger Band Width or Average True Range (ATR). Look at the chart below and see the examples of how these regimes play out.
Sentiment… You want to sell when others are greedy and buy when others are fearful. This is true of all markets, bitcoin included.
When gauging sentiment, we can look at general market sentiment using things like Total Put/Calls, Fund Flows, or the CNN Fear & Greed Index. And we can analyze the sentiment of bitcoin’s market directly. Here are two tools you can use to do that.
01. Open Interest: OI is the total number of outstanding futures contacts that have not yet been settled. It’s a measure of the money flows info futures and options market and whether they’re decreasing or increasing.
02. Sentix Crypto Sentiment Index: Sentix provides a free email newsletter that measures crypto sentiment through a broad-based institutional survey;
Start with the fundamentals. Are we progressing into a risk-on or risk-off regime? Is the monetary base expanding or contracting? Are real rates trending lower or higher? If they’re trending lower then that means there’s more of an impetus for investors to move cash into more speculative assets.
Then go to the technicals. Is the market trending up in a low volatile Bull Quiet regime? If so, you want to be finding spots to buy and go long. Is volatility contracting and low or expanding and high? Where are we in the compression to expansion regime?
Then go to sentiment, is it bearish and skeptical of the trend higher? If so, there’s likely more room for the trend to run.
That’s the Macro Ops Trifecta Approach to markets and how you can apply it to the cryptocurrency space.