Monetary policy and bitcoin prices
In this paper Sören Karau uses high-frequency transaction data of bitcoin and a VAR framework to study price responses in short windows around monetary policy announcements. His findings include:
- In response to euro area monetary policy shocks, bitcoin prices decline. This price movement would be consistent with the view that bitcoin functions as “digital gold” i.e. as a hedge against inflation;
- On the contrary, tightening by the Fed leads to an increase of bitcoin prices. Karau argues that a tightening of US monetary policy leads to a deterioration of global financial conditions and bitcoin’s low correlation with other assets makes it suitable for capital flight in the face of deteriorating economic and financial conditions;
- Case in point, bitcoin prices expressed in emerging market currencies – above all the Chinese yuan – increase especially strongly following a contractionary US monetary policy shock.
Monetary Policy and Cryptocurrencies
Author: Sören Karau
From: Deutsche Bundesbank
