Researchers at S&P Global recently released a report shedding light on the relationship between macroeconomic factors and the cryptocurrency market. While crypto-specific factors like institutional involvement and market events play a significant role in crypto price movements, the impact of macro factors has often been less clear. This report aims to explore and summarize the findings regarding how macro factors influence the crypto market.
Monetary Policy and Crypto Markets: The report indicates that monetary policy, particularly interest rates and money supply, does affect the crypto market. Low interest rates and expansive monetary policies tend to have a positive impact on crypto prices. The increase in the involvement of retail and institutional investors has also contributed to this relationship. However, the authors note that crypto-specific factors can sometimes overshadow the influence of monetary policy.
Recessionary Risks and Crypto Markets: The perception of an incoming recession can impact crypto markets, as they are considered risk assets. When recessionary risks increase, crypto markets may experience downward pressure as investors adjust their risk allocations. The report highlights the correlation between yield curve inversions and crypto market declines, suggesting a connection between the two.
Crypto as a Hedge Against Inflation: Crypto’s role as an inflation hedge is explored, with the authors emphasizing its effectiveness against demand-side inflation. However, the report notes that crypto’s correlation with broad inflation measures like two-year and 10-year inflation expectations is not significant. Yet, in developing economies and countries with weaker currencies, crypto is adopted as a counter-inflationary asset.
US Dollar Strength and Market Volatility: The strength or weakness of the US dollar affects the crypto market. Generally, crypto prices decline when the US dollar is strong, and vice versa. However, there can be lags in the relationship due to perception and market expectations. Market volatility, as measured by financial stress indices and the VIX, also spills over into the crypto market, indicating a strong correlation.
Conclusion: The report concludes that as cryptocurrencies become more common among investors, macroeconomic factors will play an increasingly significant role in shaping crypto markets. While crypto-specific factors remain crucial, understanding and monitoring macro factors can provide valuable insights into crypto price movements. It is also noted that excessive involvement of institutions in the crypto market could lead to potential spillover effects into other financial markets.
As the crypto industry evolves, categorization of cryptocurrencies based on risk and use cases may become more prevalent. Reasonable crypto regulations worldwide will likely contribute to this process, enabling clearer price discovery and investor understanding. Overall, the report suggests that a deeper understanding of the interplay between macro factors and the crypto market can help investors seize potential investment opportunities.