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Rating provider S&P Global has explored the relationship between crypto assets and macroeconomics in a new report. His conclusion is a solid “maybe” and the details are complex, mostly due to “idiosyncratic events” such as crypto winter, geography, and the short history of the industry.
Cryptocurrency assets differ from traditional assets in other performance drivers, as noted in the S&P report in the opening paragraphs, but the interconnection between the crypto ecosystem and macroeconomics is inevitable. S&P analysts compared the S&P Cryptocurrency Broad Digital Market Index (BDMI) with other financial indicators to assess the extent of this relationship in five areas.
“Crypto assets are not exempt from the impact of macroeconomic changes,” the report says, but the role of idiosyncrasy in the cryptocurrency economy is significant. For example:
“Overall, crypto markets have performed well during periods of expansionary monetary policy, although we cannot establish a causal relationship. Some of the major fluctuations in cryptocurrencies were due to factors not directly related to monetary policy, such as the collapse of 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
Crypto’s relationship to recession expectations is also very specific, although the variables differ. In this case, the factors are the location of the user and the stability of the local fiat currency. The attractiveness of cryptocurrency assets depends on fiat performance. However, the report notes the launch of “wealth management products that include crypto assets,” which is related to the perceived ability of cryptocurrencies to withstand economic shocks in general.
Related: Bitcoin falls with stocks as analyst warns of banking crisis ‘end game’
The concept of cryptocurrency as a hedge against inflation is unclear. “This is a complex topic and there may be too little data to tackle it with confidence,” the authors write. Again, geography and idiosyncrasy are factors here, they say, as the inflation resilience of cryptocurrencies could be the driving force behind its popularity in emerging markets with volatile fiat currencies. The authors also noted that cryptocurrency market cycles sometimes have causes that are not related to macroeconomics.
Analysts have written with more confidence about the relationship of cryptocurrency assets to the strength of the dollar. There is an obvious negative correlation between the two, but this is not confirmed upon closer examination. “Correlation does not replace causation,” the report says.
Crypto’s response to financial stress and market volatility has been demonstrated in relation to the CBOE Volatility Index, “also known as the Fear Index”. As the fear of instability grows in the traditional economy, the prices of crypto assets are falling. Analysts point out that the banking crisis in March has led to a decrease in the peg of some stablecoins, and crypto-friendly banks are exposed to the peculiarities of the cryptocurrency.
Given that many cryptocurrency proponents cite macroeconomic factors such as the cryptocurrency’s resilience to inflation as its main strengths, the report’s lack of firm conclusions is instructive in itself. Analysts have speculated that the link between macroeconomics and crypto assets may intensify as crypto becomes more widely institutionalized.
