As crypto matures, many accept that it’s just another asset class – albeit a risky, volatile one – that reacts to market-moving news and can thus be jumbled in with everything else macroeconomists watch.
But a new paper by economists at the New York Fed just challenged that idea. Its finding? Bitcoin, unlike most every other security bought and sold in the trillions daily, barely budges compared to traditional ‘macro’ markets, such as stocks, gold, and foreign exchange rates.
The paper, titled ‘Is There A Bitcoin-Macro Disconnect?’ contrasts Bitcoin’s reactions after economic announcements such as US jobs data, inflation, retail sales, and perhaps most importantly, Federal Reserve interest rate decisions.
The stakes are high for crypto backers. If Bitcoin and cryptocurrencies are mostly unresponsive to economic data, they could appeal more as a different and diverse asset for macro investors.
The NY Fed’s study hinges on a key factor: a brief 30-minute window following the release of macro announcements between 2017 to 2022
If instead, they react as more traditional assets do, they could remain on the fringes. Why pick Bitcoin when you can chase hard-won returns in more established markets, like emerging market currencies or junk bonds?
The NY Fed’s findings add weight to arguments from the camp that sees Bitcoin as an asset that can provide returns uncorrelated to traditional risk assets. Independent of traditional risk assets, crypto responds to news including reductions in the pace of bitcoin issuance – known as ‘halvings’ – or industry regulation.
Bitcoin’s response to Silvergate Bank’s woes is another example. The crypto lender announced last week it could not file its annual report on time with the SEC due to a weakening capital position. Bitcoin’s price traded in line with US stocks leading up to the news, then broke away from that pattern and fell.
But the NY Fed’s study hinges on a key factor: a brief 30-minute window following the release of macro announcements between 2017 to 2022. A good portion of that period includes the Covid pandemic – when the Fed cut rates and flooded markets with liquidity – suppressing volatility.
In 2022 it was a different story. The Fed started aggressive rate hikes at the fastest pace since the 1980s. That is raising doubts about the study’s conclusions.
“Rates have come back into the meaning of macro,” Macro Hive analysts Bilal Hafeez and Dalvir Mandara wrote in a response analysis to the NY Fed’s paper. They say the Fed’s moves have now come back into play when it comes to Bitcoin price fluctuations, and that the correlation between the two has been stronger than the preceding five years.
Macro Hive used daily time frames for its analysis, unlike the Fed paper, which used intraday time frames.But more than rates, daily changes in the S&P 500 best explained moves in Bitcoin’s price, Macro Hive said. That aligns with Bitcoin’s reputation as a risk asset.
‘Bitcoin’s correlation to rates is increasing, aside from when there are large supposed existential threats such as the collapse of FTX’
James Butterfill, head of research at CoinShares, said he was “baffled” by the NY Fed paper’s findings, saying that intraday pricing on bitcoin indicates a direct response to the data “totally opposite to what this paper is alluding to.”
“It fundamentally makes sense that it is a rate-sensitive asset,” Butterfill said. “We only really began to see this correlation pick up in 2021 onwards. Bitcoin’s correlation to rates is increasing, aside from when there are large supposed existential threats such as the collapse of FTX.”
Aaro Capital said in a report that even though Bitcoin and cryptocurrencies don’t provide cash flows or claims on underlying assets like stocks and bonds, changes in rates still affect crypto prices via changes in risk appetite.
Aaro’s Giovanni Ricco says there may be two ways to slice it. If one takes the view that crypto is still in its early stages of adoption and the majority of crypto supply is held by early adopter investors, one would expect to see limited impact from macro markets. On the other hand, the appearance of a correlation between crypto prices and global money supply could indicate that institutional and other investors have included holding crypto in their portfolios.
“If an investor perceives returns on crypto as volatile, an increase in interest rates which triggers a risk-off scenario would cause a rebalancing of the portfolio with a tilting towards ‘safer’ assets,” Aaro said. As more traditional investors include crypto, the larger the effect.
‘Events in TradFi inevitably bleed into and impact investor sentiment in crypto’
In any case, Aaro’s analysis found a small but “non-trivial” correlation between the two markets.
And then there’s volatility. A paper from The Risk Protocol this week called “The Nature of the Beast” examined the relationship between crypto and the VIX index – the tracker known as the “fear gauge.”
It said the broader equity market volatility had a “significant positive impact” on the volatility of Bitcoin and Ether, the two largest cryptocurrencies.
“As a cryptocurrency becomes more mature, it gets more closely tied to the broader equity market,” the paper says. “It attracts more institutional and mainstream investors and – given the resultant overlap in investor bases – events in TradFi inevitably bleed into and impact investor sentiment in crypto.”