Bitcoin has been in a gray area regarding both monetary and macroeconomic factors. Several regulators, including the New York Federal Reserve, dive deep into the relationship between crypto and monetary and macroeconomic factors and the after-effects that the asset might possess.
Although Bitcoin is a relatively new and distinct asset class, it is still subject to many of the same market forces as traditional asset classes. Sources suggest that various factors, including monetary and macroeconomic news, influence the prices of Bitcoin. For example- when there is news that inflation is rising, i.e., the value of the U.S. dollar is falling, the investors could turn to Bitcoin to use it as a potential hedge against inflation and a store of value.
Similarly, some argue that investors can shift from Bitcoin to more traditional assets in positive economic news like job growth or a rising stock market. Reportedly, Bitcoin price has been observed to be affected by regulatory or policy changes. For example- when China banned crypto trading in 2017, the asset price dropped significantly.
Analysts suggest that while Bitcoin might not be directly correlated with all traditional assets, they are subject to several same market forces, including financial and macroeconomic news. To study this topic in detail, the Federal Reserve of New York published a report analyzing the effect of macroeconomic factors on the price of Bitcoin.
The FED report titled “The Bitcoin-Macro Disconnect” highlighted the disparity between the behavior of Bitcoin and the macroeconomic factors that affect traditional assets. It also stated that Bitcoin had shown little correlation with measures of economic activity such as inflation, interest rates, and economic growth.
Additionally, Bitcoin has exhibited higher volatility than other assets, with significant price swings occurring within short periods. The report divided macro factors into three categories- news about the real economy and unemployment statistics, news about inflation, such as the Consumer Price Index, and information about monetary policy, such as a change in interest rates.
The authors revealed that they looked at how asset prices responded to these macro factors between 2017 and 2022. They chose 2017 because Bitcoin reached a “more mature stage” and seems to reference the launch of Bitcoin Futures on the Chicago Mercantile Exchange (CME) used by institutions later that year.
Many implied that the launch of the Bitcoin Futures on the CME is when institutions started manipulating the crypto market. Market manipulation has since extended to other cryptos, namely Ethereum (ETH), which is now also on the CME.
Further, the report unpacks that the authors modeled Bitcoin as a speculative asset with no intrinsic value. It states that the asset’s price is determined by interest rates which are in turn determined by macro factors. Interest rates have remained low since 2008, reflected in multiple asset classes appreciating. The Fed announced it aimed to raise rates in Nov. 2021, but the catch is that the Fed started raising rates in the spring of 2022.
However, the markets reacted because investors wanted to capitalize on potential effects, always pricing on what will happen in the future. Unemployment and inflation are relevant to interest rates because most central banks have been explicitly instructed to ensure that unemployment and inflation stay low.
Notably, central banks also act upon the guidance and achieve this dual mandate by changing interest rates. Higher interest rates result in lower inflation but higher unemployment, and vice-versa. In the context of the Fed, unemployment is around four percent and inflation targets at the two percent mark. This is why investors have been anxiously awaiting every inflation statistic – lower inflation means the Fed will lower interest.
A screenshot shared by Carlo Rosa, an author, is as follows:
The author added his views on Bitcoin and said that the asset is orthogonal to financial and macroeconomic news. He said:
This disconnect is puzzling as unexpected changes in discount rates should, in principle, affect the price of Bitcoin even when interpreting Bitcoin as a purely speculative asset.
The Fed accepts the need for more study to comprehend the mismatch between Bitcoin and macroeconomic issues. According to the research, “the finding that Bitcoin does not respond to monetary news is intriguing since it raises some concerns about the significance of discount rates in pricing Bitcoin.”
According to the Fed report, Bitcoin and cryptocurrencies are seen as speculative assets still maturing compared to other asset classes. It also implies that only time will tell whether Bitcoin will be a contender to the U.S Dollar.