Skip to content

New academic study reveals crypto market is ‘immune to general monetary policy’

New academic study reveals crypto market is ‘immune to general monetary policy'

The debate around whether returns on cryptocurrencies are not affected by the ripple effects that are created by shifting monetary policy on a global scale continues.

Apparently, international monetary policies have no effect on the returns of crypto, according to the latest peer-reviewed research paperInternational Monetary Policy and Cryptocurrency Markets‘ from Durham University Business School.

The study also revealed that the interconnectivity between cryptocurrency returns and monetary policy spillovers were especially high when shadow policy rates were negative.

This interconnectedness was shown to have reduced throughout the ‘tapering process’ that the Fed went through, and it has sharpened again more recently when crypto buoyancy returned.

Dynamic total spillover index. Source: Durham University, Professor Ahmed H. Elsayed

The researchers sought to determine whether or not conventional financial assets and cryptocurrencies were influenced in the same manner by the dynamic and spillover impacts of major nations’ foreign monetary policies on the market for cryptocurrencies. 

How the data was collected

In order to do this, the researchers used daily data on shadow policy rates, which are indications of monetary policy activities, for the Eurozone, Japan, the United Kingdom, and the United States. As a follow-up, researchers analyzed daily closing price data on three major cryptocurrency markets: Bitcoin (BTC), Litecoin (LTC), and Ripple (XRP). 

According to the findings of their research, there is a robust interconnection between cryptocurrencies, with returns that correlate as both high and positive for all of the digital currencies that were evaluated. 

Whatsmore the stuff reveals shadow short-rates and crypto returns show a low, negative association, implying monetary policy tightening hurts cryptocurrency gains. In a low-interest-rate environment, investors prefer to ‘search-for-yield,’ reinforcing the belief that cryptocurrency portfolios might offer some diversification benefits. 

“In the aftermath of the global financial crisis, central banks in both developed countries and emerging market economies have deployed a series of unconventional monetary policies,” said Professor Ahmed H. Elsayed. 

He added:

“Not surprisingly, international monetary policy spillovers became particularly relevant, posing challenges for policymakers. However, our research suggests cryptocurrencies are a less volatile asset when it comes to these spillovers.”

Monetary policy synchronization is not up to scratch

This study supports the assumption that monetary policy synchronization has been lacking in recent years due to uneven economic development. The US transmits shocks whereas the Eurozone and UK both send and receive. 

When it comes to cryptocurrencies, Bitcoin and Litecoin are considered to be net shock transmitters, but Ripple is considered to be a net receiver. 

These results of large international monetary spillovers provide problems for national authorities and highlight the significance of policy cooperation. 

Ultimately, the researchers propose creating a worldwide level playing field to eliminate regulatory arbitrage and prevent financial instability caused by sudden changes in capital flows from portfolio reallocations into and out of cryptocurrencies.

Best Crypto Exchange for Intermediate Traders and Investors

  • Invest in 70+ cryptocurrencies and 3,000+ other assets including stocks and precious metals.

  • 0% commission on stocks - buy in bulk or just a fraction from as little as $10. Other fees apply. For more information, visit etoro.com/trading/fees.

  • Copy top-performing traders in real time, automatically.

  • eToro USA is registered with FINRA for securities trading.

30+ million Users
eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. eToro USA LLC does not offer CFDs, only real Crypto assets available. Don’t invest unless you’re prepared to lose all the money you invest.

Read Next:

Weekly Finance Digest

By subscribing you agree with Finbold T&C’s & Privacy Policy

Related posts