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Currency Trading

Currency trading (forex or FX) offers investors a way to trade on country or regional fiscal/monetary situations and tendencies. Are there reliable ways to exploit this market? Does it represent a distinct asset class?

Speculator Attention and Bitcoin Return

Speculator level of interest (attention) is plausibly key to bitcoin price behavior. Does the level of online searches for “bitcoin” as a proxy for attention usefully predict bitcoin return? To investigate, we examine interactions between monthly worldwide search intensity for “bitcoin” as measured by Google Trends to represent speculator attention and monthly bitcoin returns. Using monthly Google Trends data starting September 2014 (to coincide with inception of source price tracking) as retrieved on 9/6/2021 and end-of-month bitcoin prices during September 2014 through August 2021, we find that: Keep Reading

Predictable Bitcoin Momentum or Reversion?

Does bitcoin (BTC) price predictably exhibit momentum or reversion? To investigate, we try three tests:

  1. Calculate autocorrelations (serial correlations) between daily, weekly and monthly (4-week) BTC returns and BTC returns for the next five respective intervals (for example, correlation of daily return with returns the next five days). Positive and negative correlations suggest momentum and reversion, respectively.
  2. Calculate correlations between next-week BTC return and current BTC price relative to its high or low over the last 13 weeks. A positive correlation for closeness to the recent high (low) suggests momentum (reversion).
  3. Calculate average next-week BTC returns by ranked fifth (quintile) of BTC price relative to its high or low over the last 13 weeks.

Using daily, weekly and monthly (4-week) BTC closing prices during September 14, 2014 (the earliest available from the source) through August 31, 2021, we find that:

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Bitcoin Displacing Gold?

Is Bitcoin beginning to displace gold as a U.S. dollar hedge? To investigate, we look at rolling correlations of returns for the following pairs of exchange-traded funds (ETF):

  1. Grayscale Bitcoin Trust (GBTC) and SPDR Gold Shares (GLD). This relationship should perhaps trend negative if investors are shifting from gold to Bitcoin.
  2. GBTC and Invesco DB US Dollar Index Bullish Fund (UUP). This relationship should perhaps trend negative if investors are hedging currency weakness with Bitcoin.
  3. GLD and UUP. This relationship should perhaps trend less negative if investors are shifting away from gold as a currency hedge.

Using daily and monthly adjusted prices for these three ETFs during May 2015 (limited by GBTC) through mid-August 2021, we find that: Keep Reading

Future of Stablecoins?

The National Bank Act of 1863 created a national currency backed by U.S. Treasury bonds and curtailed the era of Free Banking (wildcat private currencies), which resembles the current environment of stablecoins (such as Tether and Diem). Subsequent legislation taxed private currencies out of existence. Does this history offer lessons for the future of stablecoins? In their July 2021 paper entitled “Taming Wildcat Stablecoins”, Gary Gorton and Jeffery Zhang explore the feasibility of stablecoins as a medium of exchange, with focus on acceptance at par and susceptibility to runs. They also present proposals to address  systemic stablecoin risks. Based on lessons from history, they conclude that: Keep Reading

Defi Risks and Crypto-asset Growth

What Decentralized Finance (DeFi) issues may dampen associated interest in crypto-assets by undermining its promises of lower costs and risks compared to traditional, centralized financial intermediaries? In their June 2021 book chapter entitled “DeFi Protocol Risks: the Paradox of DeFi”, Nic Carter and Linda Jeng discuss five sources of DeFi risk:

  1. Interconnections with the traditional financial system.
  2. Blockchain-related operational issues.
  3. Smart contract vulnerabilities.
  4. Other governance and regulatory concerns.
  5. Scalability challenges.

A general objective of DeFi is automating rules for behavior in a publicly available financial system, eliminating human discretion from financial transactions/contracts. In practice, however, core DeFi protocols retain some human oversight to address unpredictable problems as they emerge, but such retention allows incompetent or malicious governance, administration and validation (see the figure below). Based on review of the body of research and opinion, they conclude that:

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Measuring Crypto-asset Price and Policy Uncertainty

How uncertain are investors about cryptocurrencies, and what drives their collective uncertainty? In their March 2021 paper entitled “The Cryptocurrency Uncertainty Index”, Brian Lucey, Samuel Vigne, Larisa Yarovaya and Yizhi Wang present a Cryptocurrency Uncertainty Index (UCRY) based on news coverage, with two components defined as follows:

  1. UCRY Policy -weekly rate of cryptocurrency policy uncertainty news minus average weekly observed rate, divided by standard deviation of weekly observed rate, plus 100.
  2. UCRY Price – weekly rate of cryptocurrency price uncertainty news minus average weekly observed rate, divided by standard deviation of weekly observed rate, plus 100.

They distinguish between these two types of cryptocurrency uncertainty to understand differences in behaviors between informed (policy-sensitive) and amateur (price-sensitive) investors. Using 726.9 million relevant date/time-stamped news stories during December 2013 through February 2021, they find that: Keep Reading

Comparing and Contrasting Gold and Bitcoin

Are gold and bitcoin similar assets? In his December 2020 paper entitled “Bitcoin is Exactly Like Gold Except When it Isn’t”, Claude Erb compares and contrasts the following aspects of gold and bitcoin:

  • Inflation hedge – how well an asset tracks some measure of inflation/purchasing power.
  • Store of value – the ability of an asset to hold its value over long periods.
  • Safe haven – how well an asset holds its value during equity market crashes.
  • Valuation – intrinsic value of an asset.

Based on a survey of related research and arguments, he concludes that: Keep Reading

SACEVS and SACEMS from a European Perspective

A European subscriber asked about the effect of the dollar-euro exchange rate on the Simple Asset Class ETF Value Strategy (SACEVS) and the Simple Asset Class ETF Momentum Strategy (SACEMS). To investigate, we each month adjust the gross returns for these strategies for the change in the dollar-euro exchange rate that month. We consider all strategy variations: Best Value and Weighted for SACEVS; and, Top 1, equally weighted (EW) Top 2 and EW Top 3 for SACEVS. We focus on SACEVS Best Value and SACEMS EW Top 3. We consider effects on four gross performance metrics: average monthly return; standard deviation of monthly returns; compound annual growth rate (CAGR); and, maximum drawdown (MaxDD). Using monthly returns for the strategies and monthly changes in the dollar-euro exchange rate since August 2002 for SACEVS and since July 2006 for SACEMS, both through December 2020, we find that: Keep Reading

Crypto-assets as Currencies

Can Bitcoin, or any other crypto-asset, become a durable currency, or is its value a pure bubble? In his October 2020 paper entitled “Fiat Money, Cryptocurrencies, and the Pure Theory of Money Edward Elgar Handbook on Blockchain and Cryptocurrencies”, David Glasner applies basic concepts and doctrines of the economic theory of money to address the value of bitcoins and other crypto-assets. He focuses on rationalizations for a positive equilibrium value for bitcoin and other crypto-assets. Based on his interpretation of theory, he concludes that:

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Timing GBTC Based on Its Inferred Premium

“Evolution of Bitcoin as an Investment” suggests a shift toward acceptance of Bitcoin (BTC) as an investment asset, as do recent actions by some large investors. Grayscale Bitcoin Trust (GBTC) offers a way for investors to access BTC via a fund that manages BTC holdings. GBTC price generally carries a premium over its BTC holdings in consideration for this convenience (17% as of the end of 2020). Does variation in this premium indicate good times to buy and sell GBTC? To investigate, we use the ratio GBTC/BTC (with BTC divided by 1,000 because the prices greatly differ in scale) as an easy way to infer the premium. We then look at ways to exploit variation in the ratio to buy and sell GBTC. Because of the rapid evolution of Bitcoin, we limit analysis to recent data. Using daily closing prices of GBTC and BTC during 2019 through 2020, we find that: Keep Reading

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