Are Bitcoin Vol Trader’s More Effective Than The FED at Predicting Inflation? Yes....
- Strategeriest
- Mar 21, 2021
- 3 min read
Updated: Apr 25, 2021
Good afternoon,
Please see the attached. I back tested a common vol trading strategy against a buy and hold strategy. The strategy I tested was; over the past six years, was I made one trade of one BTC at the end of each month, either a buy or a sell. The decision to buy, or to sell with unlimited margin was based upon a proxy for a moving average of returns divided by a moving average of volume. The parameters are in the model for your review.
Please note the results of the strategy are not optimized. I do not recommend trying to trade using this strategy, I looked at it for another reason. The reason being, I assumed that even considering the low-rate environment; if the economy was doing well or there were inflation concerns, the FED would be more likely to raise rates, and Bitcoin prices and trading volumes would increase until the rate increases where announced.
I analyzed the results with the intention of trying to guess when the Fed will raise rates. My hypothesis was that if strategy outperforms buy and hold, smart traders where in the asset class, which indicated they either had too much time on their hands because the economy was doing well, or they were hedging for expected inflation. The hypothesis held.
The model also has some other interesting results. It showed the precarious position the FED was in during the last couple of rate increases in 2018, and also seemingly timed some of the PPE Payments by the amount of leverage in the trading account.
In conclusion, considering the rarity of rate increases, I do not believe this indicator will be useful to predict future rate increases. However, I found it to be remarkably interesting data to consider though, as BTC Vol traders seem to be particularly good at predicting inflation. I included in the model cold rolled steel as a hamburger index.(its a personal preference, please feel free to plug in which ever inflation gauge you trust the most)
Regarding a solution that would enable investors to predict FED interest rate moves, I think listening to their minutes is still the solution. Obviously with the enormous amount of data the FED collects, they can keep track of PPP trajectories, but their interest rate moves suggest they are facing an impossible dual mandate that is only going to become more of a challenge considering the current tax plan proposal in congress.
If you consider the effect that lowering the corporate tax rate had on long term unemployment, the employment picture is in big trouble when they increase the corporate tax rate.
In my opinion they will not be able to reduce unemployment significantly by keeping rates low over the next year. I expect unemployment to decrease with COVID waning, then stabilize adjusted to the new tax rate. At that point, the FED may be able to influence it by lowering rates, but they would need to have raised rates to a level in which cutting them would make a difference.
As such, it is my opinion that the FED should raise rates to curb inflation immediately.
Please note I am also of the opinion that the J Curve effect is caused by low liquidity in the FX market, and people should always want their currency to increase in value. I’ll explain in my next post.
Warmest Regards,
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