Analyzing Bitcoin’s Response to Monetary Policy: A Comprehensive Study

• Research by Adams, Ibert, and Liao uses VAR model to link economic factors with cryptocurrency market behaviors.
• Study incorporates role of stablecoins, considering them safe assets within crypto, impacting market through adoption levels.

Recent studies by researchers Austin Adams, Markus Ibert, and Gordon Liao offer valuable insights into the influencing cryptocurrency market behavior, particularly Bitcoin. Their research utilizes a structural vector auto-regressive (VAR) model to examine how various economic factors impact cryptocurrency values.

So what drives crypto prices?

We teamed up with @circle and the Copenhagen Business School to find the answer

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Impact of Monetary Policies and Risk Sentiment

The research highlights how traditional economic factors like monetary policy significantly affect cryptocurrency returns. The study found that contractionary monetary policies were primarily responsible for Bitcoin’s sharp price decline in 2022. It noted that the compression of crypto risk premiums, rather than movements in the equity market, have primarily driven cryptocurrency returns since 2023.

Analyzing Bitcoin’s Price Movements

Using a sign-restricted VAR model, the study breaks down Bitcoin’s price fluctuations into several components: changes due to traditional monetary policy, shifts in risk premiums, and crypto-specific demands. Notably, actions by the Federal Reserve heavily influenced Bitcoin’s downturn in 2022. 

The research points out that daily price movements in Bitcoin are not fully explained by these traditional economic indicators, suggesting unique market forces at work within the cryptocurrency sector.

The analysis further considers the role of stablecoins , treating them as safe assets within the cryptocurrency market. It examines how shifts in the market capitalization of stablecoins against more volatile cryptocurrencies like Bitcoin can indicate changes driven by risk premiums or varying levels of adoption.

Crypto-Specific Influences

The study underscores the impact of crypto-specific factors , such as shifts in adoption rates and changes in risk premiums, on the daily price variability of Bitcoin. This distinction emphasizes the importance of understanding unique elements affecting the cryptocurrency markets, separate from broader financial market influences.

Event-Driven Market Impacts

Additionally, the researchers conducted event studies focusing on significant occurrences like the COVID-19 pandemic and the FTX collapse to assess their effects on the cryptocurrency markets. These studies highlight the substantial influence of crypto-specific events over market movements during major incidents.