‘The Bitcoin-Macro Disconnect’ by Gianluca Benigno and Carlo Rosa, published this month by the Federal Reserve Bank of New York, is a staff report inspired by the aim to figure out the drivers of prices of Bitcoin, the most popular of cryptocurrencies. The motivation comes from the huge market capitalization that Bitcoin soared to recently, reaching above $1 Trillion in 2021.
The study’s introduction begins with two quotes, one from Jerome Powell, chair of Fed Reserve, which calls crypto assets as an asset for speculation and a substitute for gold rather than the dollar. The other quote is from Fabio Panetta, an Italian economist and member of the European Central Bank, who called crypto as gambling disguised as investment.
If Bitcoin and crypto have no intrinsic value and are purely speculative – bought only with the aim of being sold at a higher price – than it would certainly be important to try and figure out the price drivers. In particular, does macroeconomic and monetary policy news – like those concerning rising interest rates – affect Bitcoin price?
The paper summarizes the aim as: “In this paper, we conduct a systematic analysis of the impact of macroeconomic and monetary policy news on Bitcoin’s price.”
For the study, high-frequency trading intraday price data was used for analysis so as to observe the immediate impact. Bitcoin was treated as an asset being sold at discounted prices today, thus expecting a rise in value in the future. This means any news of change in Fed interest rates should have some impact on its price movements.
The finding: “In our empirical analysis, we find that Bitcoin is unresponsive to both monetary and macroeconomic news.”
However, the study has some constraints: “Given the short sample used in the analysis, however, more evidence is needed to assess the disconnect between Bitcoin and macroeconomic fundamentals.”
The types of news that were used included: news about payroll, joblessness claims, industrial production, retail sales, unemployment, trade balance, inflation, etc., as well as forward looking indicators.
The price behaviour of Bitcoin was in stark contrast to traditional assets like gold, silver, S&P 500, etc. The price reaction of the latter was large and significant. Only CPI (consumer price index) news had some influence on Bitcoin price.
A more important study as far as crypto is concerned would be Elon’s tweets and news of his holdings and Bitcoin prices.
Read the full paper here: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr1052.pdf
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