If you’re reading this, chances are that you’re a crypto trader and that you’re not too interested in the legacy markets (stocks, bonds, forex etc.), or that you only dabble in trading some of these with a Technical Analysis-based approach. But, as you’ve also probably noticed lately, there are times when it’s absolutely essential to keep track of the bigger macro picture, as the tone that Powell uses to say the word “inflation” can have a bigger impact on the entire crypto market than any fundamental development from within crypto itself. In this post, we’ll take a look at why that’s the case, which macro-level factors are especially important for crypto and what that means for your trading strategy. Don’t worry, you won’t need to look at hundreds of spreadsheets of data on each individual stock in the S&P 500, but just a basic understanding of how the legacy markets work and affect crypto will go a long way in terms of protecting your capital. 

The double-edged sword of institutional adoption

You might have a few questions about why we’d even need to talk about this in the first place: If crypto is meant to completely revolutionize finance, then why should it be so correlated to the legacy markets? And if Bitcoin is meant to introduce a radically new form of money without any form of centralized control, then why is its price so heavily influenced precisely by the central banks of all things? Does this mean that the whole experiment has failed?

Most people – at least those who start out with crypto before learning about other financial markets in-depth – are overwhelmed by these questions at some point. Fortunately, the answer is simple, and it has nothing to do with whether crypto as a whole will succeed in its grand endeavor to bring about a new world of finance (which we – and probably you as well – have every reason to believe it will). 

If we look at the early days of Bitcoin, or for that matter the previous bull runs across the crypto space, there simply wasn’t nearly as much correlation with legacy markets as there is now. Back then, crypto was a small niche that mainly drew interest from tech-savvy people and, later on, some retail speculators that didn’t understand what it was, but still wanted some exposure in case it catches on. That means that the people that were investing in crypto weren’t involved with stocks, bonds and other traditional markets and, as a consequence, these markets didn’t impact what those people did in crypto.

Nowadays, the situation could hardly be more different, as the long-awaited wave of institutional adoption is here, and it’s no longer strange to hear Wall Street traders or top CEOs talk about their investments in crypto. But these people have little in common with the early adopters: they mainly trade the legacy markets, and they see crypto as a similar asset to tech stocks, due both to its nature and – especially – its volatility. So, when market conditions cause them to go risk-off and reduce exposure, they will also reduce their exposure to crypto, and vice versa, causing BTC and stocks to be correlated.

What this means for your trading and investment strategy

If you’re not interested in spending as much time monitoring legacy markets as Wall Street traders, then there are some extremely simple ways to get a decent grasp of the macro winds that can affect crypto in an extremely easy way. If you want to just keep an eye on the stock market in general, then you don’t need to look at the charts of individual stocks at all. In fact, many crypto traders only monitor the S&P 500 index, which tracks the performance of 500 large companies, making it an extremely good summary of the overall performance of stocks at any given point.

To go a step further, you could also keep track of the U.S. Dollar Index ($DXY), which tracks the dollar’s performance relative to other major currencies. DXY is typically inversely correlated to crypto and risk-on equities, since the dollar gains value when less of it is injected into the supply, as well as when investors flock to its relative safety in the event of geopolitical uncertainty.

When it comes to specific events to take into consideration, Federal Reserve meetings and announcements are by far the most important, as well as inflation data shown in the CPI (Consumer Price Index). It is possible, however, to just use the S&P 500 as a proxy and avoid going in-depth into Fed policy, because any new information – whether an unexpectedly dovish (rate cuts, quantitative easing, bullish for stocks and crypto) or hawkish (rate hikes, quantitative tightening, bearish) announcement – will immediately get “priced in,” meaning that its effects will be reflected in the stock market. 

If you do want to keep track of these announcements, however, then there’s one golden rule to always keep in mind: always look at what the market is expecting before drawing any conclusions as to the effects it’s likely to have. For example, an extreme rate hike might actually be very bullish because most investors were expecting an even more extreme hike. The market discounts all available information, and Fed meetings, announcements and inflation data will only move the market if they’re outside of prior expectations and estimates (that’s why you’ll always see the previously estimated number along with the new CPI number every month).

Finally, if you’re mostly scalping crypto, you can get by without taking legacy markets into consideration too much, but there are still a couple of things to keep in mind: first, expect a lot of volatility around Fed announcements. Even if the numbers are in line with expectations, a slightly more dovish or hawkish undertone in just one sentence uttered by a Fed representative can be enough to wreak havoc on the 5-minute chart. Second, take into account opening and closing times of the New York Stock Exchange: crypto is typically more liquid while legacy markets are open, while weekends and holidays can lead to less liquidity and more volatile price action. Overall, that covers all the crucial legacy factors to consider when trading crypto, and if this post helped you get a grip on this sometimes confusing world, then share it with your friends and feel free to send us any feedback or suggestions!