Currency Trading

The market view of Bitcoin has increasingly shifted from a potentially useful currency to an investment asset with no yield but potentially high capital gain. What are the implications of its success in the latter role? In their October 2024 paper entitled “The Distributional Consequences of Bitcoin”, Ulrich Bindseil and Jürgen Schaaf model a scenario in which the price of Bitcoin rises for the foreseeable future due to persistent collective belief that its price will continue to rise. Modeling assumptions are:

• All Bitcoin has been mined, such that the supply is constant.
• Bitcoin has no impact on the capacity of the economy to produce goods and services because it has no economic value.
• Success stories of early adopters sustain a steady increase in demand from latecomers, satisfied by early adopter selling. With a fixed supply, price depends exclusively on (rising) demand.
• Latecomers finance Bitcoin purchases by reducing consumption and liquidating real assets (which are bought by early adopters).
• Bitcoin wealth stimulates higher consumption by holders, balanced by the lower consumption of others because Bitcoin does not increase economic activity (ignoring for simplicity the possibility of reduction in other investments). In other words, Bitcoin is a zero sum game.
• Everyone eventually buys some Bitcoin (people never holding Bitcoin would fare worse than latecomers).

Based on market experience with Bitcoin and their model, they conclude that: Keep Reading

Are managed futures, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider six managed futures ETFs, five live and one dead:

1. WisdomTree Managed Futures Strategy (WTMF) – seeks positive total returns in rising or falling markets that are uncorrelated with broad market equity and fixed income returns via diversified combination of commodities, currencies and interest rates futures.
2. First Trust Morningstar Managed Futures Strategy (FMF) – seeks positive returns that are uncorrelated to broad market equity and fixed income returns via a portfolio of exchange-listed futures.
3. ProShares Managed Futures Strategy (FUT) – seeks to profit in rising and falling markets by long and short positions in futures across asset classes such as commodities, currencies and fixed income such that each contributes equally to portfolio risk. (Dead as of May 2022.)
4. iM DBi Managed Futures Strategy (DBMF) – seeks long-term capital appreciation via long and short positions in futures across equities, fixed income, currencies and commodities. Fund positions approximate the current asset allocation of a pool of the largest commodity trading advisor hedge funds.
5. KraneShares Mount Lucas Managed Futures Index Strategy ETF (KMLM) – seeks to track an index comprised of 22 liquid futures contracts traded on U.S. and foreign exchanges. The index includes groups of 11 commodities, six currencies, and five global bonds, with groups weighted by relative historical volatility and individual contracts weighted equally within each group.
6. Simplify Managed Futures Strategy (CTA) – seeks long term capital appreciation by systematically investing in futures in an attempt to create an absolute return profile, that also has a low correlation to equities, and can provide support in risk-off events.

We focus on average return, standard deviation of returns, reward/risk (average return divided by standard deviation), compound annual growth rate (CAGR), maximum drawdown (MaxDD) and correlations of returns with those of SPDR S&P 500 (SPY) and iShares Barclays 20+ Year Treasury Bond (TLT), all based on monthly data, as key performance statistics. We use Eurekahedge CTA/Managed Futures Hedge Fund Index (Eurekahedge) as a benchmark. Using monthly returns for the six managed futures funds as available through August 2024, and contemporaneous monthly returns for the benchmark, SPY and TLT, we find that:

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Are large and sophisticated investors (whales) better than small retail investors (minnows) at timing established crypto-asset markets? In their August 2024 paper entitled “Beneath the Crypto Currents: The Hidden Effect of Crypto ‘Whales'”, Alan Chernoff and Julapa Jagtiani compare short-term timing abilities of whales and minnows trading Ethereum (ETH). Specifically, they explore relationships between next-day ETH returns and ETH holdings in e-wallets of four size groups: (1) more than $1 million (whales); (2) $100,000 to $1 million; (3) $10,000 to $100,000; and, (4) less than $10,000 (minnows). They control for supply of ETH in circulation and major crypto-asset market events. Using daily data for ETH from Coin Metrics, including price (midnight to midnight) and holdings/value by e-wallet size group, during January 2018 through December 2023, they find that:

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How do crypto-asset prices interact with conventional market risks, monetary policy and crypto-specific factors? In their July 2024 paper entitled “What Drives Crypto Asset Prices?”, Austin Adams, Markus Ibert and Gordon Liao investigate factors influencing crypto-asset returns using a sign-restricted, structural vector auto-regressive model. Specifically, they decompose daily Bitcoin returns into components reflecting:

• Monetary policy – estimated from effects of changes in the short-term risk-free rate on crypto-asset prices.
• Conventional risk premiums – estimated from daily interactions of 2-year zero coupon U.S. Treasury notes (T-notes) and the S&P 500 Index to account for changes in risk compensation required for holding traditional financial assets.
• Crypto risk premium – estimated from variations in the risk compensation demanded
  by investors for holding crypto assets as indicated by crypto-asset market liquidity and volatility.
• Level of crypto adoption – estimated from co-movements of Bitcoin and stablecoin market capitalizations to reflect crypto-asset innovation, regulatory changes and sentiment shifts.

Using daily data for the risk-free rate, S&P 500 Index, T-notes, Bitcoin and two stablecoins (USDT and USDC), during January 2019 through February 2024, they find that: Keep Reading

Can investors manage cryptocurrency volatility risk with simple trend following rules? In their August 2024 paper entitled “Trend-following Strategies for Crypto Investors”, Trinh Hue Le and Ummul Ruthbah test simple trend following rules on Bitcoin (BTC), Ether (ETH) and the S&P Cryptocurrency LargeCap-Ex. MegaCap Index. Specifically, they hold the cryptocurrency (cash) when its price is above (at of below) its prior-day simple moving average (SMA) of 20, 65, 150 or 200 days. To assess net profitability, they consider trading frictions of 0.1%, 0.25% or 0.5% of amount traded. They further measure correlations between the movements of cryptocurrencies and those of the Nasdaq 100 Index. Using daily prices for the S&P BTC, ETH and Cryptocurrency LargeCap-Ex. MegaCap indexes starting January 2016, January 2017 and January 2019, respectively, all through January 2023, and contemporaneous daily levels of the NASDAQ 100 Index, they find that:

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Are there predictable dollar exchange rate trends according to which U.S. political party is in power? In their March 2024 paper entitled “Presidential Cycles and Exchange Rates”, Pasquale Della Corte and Hsuan Fu investigate whether the party holding the U.S. presidency predicts the dollar exchange rate. Their presidential cycle starts in November with a presidential election and ends four years later at the end of October. They express all exchange rates in U.S. dollars per unit of foreign currency. They consider currencies of countries with developed and emerging economies, making adjustments for introduction of the euro in January 1999, starting with nine currencies in 1983 and ending with 20 currencies. They relate findings to differences in country interest rates and inflation rates and to shifts in trade policy (tariffs). Using end-of-month dollar exchange rates for the selected currencies, global economic data and a measure of aggregate global trade restrictions during October 1983 through January 2024, they find that:

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What are the implications of mainstream economics for bitcoin? In his March 2024 paper entitled “Bitcoin: What Does Mainstream Economics Have to Say?”, Joshua Hendrickson tackles the following questions:

1. Why does money exist and what role does it play in society? How does bitcoin fit our understanding of this role?
2. What is bitcoin worth?
3. Is bitcoin (or can bitcoin be) a sound form of money?
4. Should governments adopt bitcoin?

His goal is to decipher how economics (not any particular economist) answer these questions. Applying mainstream economic theory, he concludes that: Keep Reading

How do different asset classes interact with euro-U.S. dollar exchange rate? To investigate, we consider relationships between Invesco CurrencyShares Euro Currency (FXE) and the exchange-traded fund (ETF) asset class proxies used in the Simple Asset Class ETF Momentum Strategy (SACEMS) or the Simple Asset Class ETF Value Strategy (SACEVS) at a monthly measurement frequency. Using monthly dividend-adjusted closing prices for FXE and the asset class proxies since February 2006 as available through August 2023, we find that: Keep Reading

How do different asset classes interact with U.S. dollar valuation? To investigate, we consider relationships between Invesco DB US Dollar Index Bullish Fund (UUP) and the exchange-traded fund (ETF) asset class proxies used in the Simple Asset Class ETF Momentum Strategy (SACEMS) or the Simple Asset Class ETF Value Strategy (SACEVS) at a monthly measurement frequency. Using monthly dividend-adjusted closing prices for UUP and the asset class proxies since March 2007 as available through August 2023, we find that: Keep Reading

A subscriber asked about an assertion that bitcoin (BTC) price trend/return predicts return of the S&P 500 Index (SP500). To investigate, we relate BTC returns to SP500 returns at daily, weekly and monthly frequencies. We rationalize the different trading schedules for these two series by excluding BTC trading dates that are not also SP500 trading days. Most results are conceptual, but we test three versions of an SP500 timing strategy based on prior BTC returns focused on compound annual growth rate (CAGR) and maximum drawdown (MaxDD). Using daily SP500 levels and (pruned) BTC prices during 9/17/2014 (limited by the BTC series) through 12/21/2022, we find that:

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