The market capitalization of cryptocurrencies has grown rapidly in recent years. This blog post analyzes the role of macro factors as potential drivers of cryptocurrency prices. We take a high-frequency perspective, and we focus on bitcoin because its market capitalization dwarfs that of all other cryptocurrencies combined. The key finding is that, unlike other asset classes, bitcoin has not reacted significantly to US macro and monetary policy news. This disconnect is intriguing, because unexpected changes in the discount rate should, in theory, affect bitcoin’s price.
background
Prior to its recent decline, the market capitalization of cryptocurrencies had reached $2.5 trillion, with bitcoin crossing the $1 trillion mark. Furthermore, bitcoin represents the lion’s share – between 50 percent (nowadays) and 90 percent (in 2016) – of the overall capitalization of the digital currency market.
Market capitalization of bitcoin and other cryptocurrencies
Source: Authors’ calculations.
Notes: The chart shows the market capitalization of Bitcoin and twenty-two other cryptocurrencies (Aave, BinanceCoin, Cardano, ChainLink, Cosmos, CyrptocomCoin, Dogecoin, EOS, Ethereum, Iota, Litecoin, Monero, NEM, Polkadot, Solana, Stellar, Tether). , Tron, Uniswap, USDCoin, WrappedBitcoin, and XRP). Market capitalization is calculated by multiplying the total number of coins in circulation by their price.
Given their increasing relevance, it is only natural to study the drivers of cryptocurrency prices. This blog post focuses on macroeconomic news and monetary policy surprises. We interpret cryptocurrencies as assets whose present value should depend on the expected discounted value of future values. This characterization means that, from a macroeconomic perspective, developments that affect current and future interest rates, whether directly (news about monetary policy) or indirectly (news about macroeconomic conditions), Should affect the value of cryptocurrencies.
We use a new and comprehensive intraday data set to identify the effects of this news. By relying on high-frequency data in a small enough window around the macro announcement, the data release is (most likely) the only information systematically hitting the market. Therefore, this blog post conducts an empirical finance version of a natural experiment, looking at the reaction of asset prices around various announcements at that time.
As an example, the chart below shows the reaction of many US asset prices around two types of news releases: news about the real economy, such as the Bureau of Labor Statistics’ employment situation report (left panel), and news about monetary policy. News about, especially the FOMC meeting (right panel). The June 2016 labor market report included a lower-than-expected non-farm payrolls figure than the Bloomberg consensus. As a result, the dollar immediately fell by about 1 percent against the euro, stock prices fell by about 0.5 percent, and gold prices rose by 2 percent. On the other hand, bitcoin moved sideways. At the Fed meeting in June 2021, the FOMC indicated that interest rates needed to rise sooner and faster than market participants expected. Again, the dollar, gold and stock prices reacted quickly to the release, but bitcoin did not react in a systematic manner.
US asset prices react to macroeconomic and monetary policy news
Source: Authors’ calculations.
Note: Responses are normalized to zero at the time of news release. The horizontal axis displays the hours before/after release. EUR/USD refers to the euro/dollar exchange rate, which is defined as the amount of US dollars required to buy one euro.
analysis and results
We systematically analyze the response of the EUR/USD exchange rate, gold, S&P 500, and bitcoin to ten sets of macro announcements that have been selected as significant in the academic literature. In studying the responses of selected asset prices to macroeconomic and monetary policy news, we focus on the period 2000–2022 for all assets except bitcoin, for which we restrict (more meaningfully) starting from 2017. Chose the sample. (For more on this analysis, see our related staff report on this topic.) We aggregate various pieces of macro news, covering the real economy and inflation as well as monetary policy surprises. For monetary policy news, we consider three different dimensions. first indicator, Target, captures unexpected changes in the current federal funds rate target. second indicator, path, indicating unexpected changes in the future course of policy. third indicator lsapCaptures unexpected announcements of large-scale asset purchases in the future.
Our foregoing is based on a simple asset pricing model for bitcoin. We model bitcoin as an asset that has no intrinsic value, whose present value depends on the discounted value of its future price (for our lovely winks, a “stochastic bubble”). We also adjust for the probability that the asset has no value and the probability that it depends positively on current and future interest rates. Since monetary policy news affects both current and future interest rates, it should be linked to bitcoin valuations, while macroeconomic news has an indirect effect through the monetary policy feedback function.
By relying on regression estimates, we can test the extent to which an asset’s price response to a macroeconomic announcement is systematic. The table below reports the correlation between assets (columns) and selected macroeconomic and monetary news (rows). Shading indicates whether the response is systematic, with darker colors corresponding to more statistically significant effects. The symbol inside each cell indicates an indication of the relationship between asset returns and news. We find that the EUR/USD exchange rate, gold, and the S&P 500 react significantly to most macro and monetary news. In contrast, bitcoin’s response is muted, and never significant at the 1 percent level, even if we focus only on monetary policy news.
Comparing asset price reactions to news events
conclusion
So… are macroeconomic news driving bitcoin? In this post, we conduct a systematic analysis of the impact of macroeconomic and monetary policy news on the price of bitcoin. Unlike exchange rates and stocks, bitcoin is largely unresponsive to macro news. The more intriguing result is that bitcoin doesn’t react as well to monetary policy surprises. At face value, our study casts some doubt on the role of discount rates in bitcoin pricing. Given the small sample used in the analysis, the jury is still out on this one, and more evidence is needed to restate the case.
Gianluca Benigno is Head of International Studies in the Research and Statistics Group of the Federal Reserve Bank of New York and Professor of Economics at the University of Lausanne.
Carlo Rosa is Assistant Professor at the University of Parma (Italy).
How to cite this post:
Gianluca Benigno and Carlo Rosa, “Is There a Bitcoin-Macro Disconnect?,” Federal Reserve Bank of New York Liberty Street EconomicsFebruary 8, 2023,
disclaimer
The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any error or omission is the responsibility of the author(s).
Source: libertystreeteconomics.newyorkfed.org
