Rating provider S&P Global has examined the relationship between crypto assets and the macro economy in a new report. His conclusion is a firm “maybe” and the details are complex, due mainly to “idiosyncratic events” such as the cryptocurrency bear market, geography and the industry’s short history.
Crypto assets have a different value proposition than traditional assets and different drivers of performance, the S&P report notes in its introductory paragraphs, but the interconnectedness of the crypto ecosystem and macroeconomics is inescapable. S&P analysts compared the S&P Cryptocurrency Broad Digital Market Index (BDMI) to other financial indicators to assess the extent of that interconnectedness in five areas.
“Crypto assets are not exempt from the effect of macroeconomic changes,” the report states, but the role that idiosyncrasy plays in the crypto economy is significant. For example:
“In general, cryptocurrency markets have performed well in periods of easy monetary policy, although we cannot establish a causal relationship. Some of the large swings in cryptocurrencies have been triggered by factors not directly related to monetary policy , such as the collapse of the FTX”.
On a daily rolling three-month basis interest rates and the #crypto index have exhibited an inverse relationship 63% of the time since May 2017. This increases to 75% from May 2020, following the start of the COVID-19 pandemic.
Read the latest research: https://t.co/WH4cWUOUiT pic.twitter.com/FAJ06RSwZH
—S&P Global (@SPGlobal) May 10, 2023
The relationship of cryptocurrencies to recession expectations is also very specific, although the variables differ. In this case, the location of the user and the stability of the local national currency are factors. The attractiveness of crypto assets depends on the behavior of fiat. Nonetheless, the report notes the launch of “asset management products that include crypto assets” tied to the perceived ability of crypto assets to withstand broader economic shocks.
The outlook for cryptocurrencies as an inflation hedge is unclear. “This is a complex issue, and the data may be too sparse to address it for sure,” the authors wrote. Again, geography and idiosyncrasy are factors, as cryptocurrency’s resilience to inflation can boost its popularity in emerging markets with unstable national currencies. The authors also noted that crypto market cycles sometimes have non-macroeconomic causes.
Analysts wrote with greater certainty about the relationship of crypto assets to the strength of the dollar. There is an apparent negative correlation between them, but a more detailed analysis did not corroborate it. “Correlation is no substitute for causation,” the report said.
The reaction of crypto assets to financial stress and market volatility was demonstrated in relation to the CBOE Volatility Index, “also known as the fear index.” As fear of instability in the traditional economy increases, the prices of certain crypto assets fall. The March banking crisis caused that some stablecoins lose their parity, and some pro-crypto banks are exposed to the idiosyncrasies of these, the analysts pointed out.
Considering that many cryptocurrency advocates cite macroeconomic factors, such as the resistance of cryptocurrencies to inflation, Like its main strengths, the report’s lack of firm conclusions is illuminating in itself. Analysts speculate that the link between macroeconomics and crypto assets will increase with greater institutional adoption of cryptocurrencies.
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