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Financial Markets

What drives the volatility of bitcoin prices

Posted by e-axes on February 24, 2022

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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

Geopolitical risk and bitcoin prices

Menzie Chinn finds that VIX and GPR (Geopolitical Risk Index) have the highest correlation with the price of bitcoin: negative with VIX, positive with GPR.  A major war in Ukraine might have a qualitatively and quantitatively different impact on bitcoin prices.



Bitcoin and Different Types of Uncertainty/Risk
By: Menzie Chinn – University of Wisconsin–Madison

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