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Monetary policy and Bitcoin

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  • Karau, Sören

Abstract

I empirically study the impact of monetary policy on Bitcoin, and show that is has evolved over time. First, based on high-frequency data, the paper documents that Bitcoin prices did not immediately respond to US monetary policy announcements in the past; they only started doing so in late 2020, in a manner similar to other risky asset prices. Second, based on a structural VAR analysis I study the impact of monetary policy over longer horizons. I confirm the contractionary impact of a US monetary tightening in the post-2020 time period, but show that, historically, a US tightening used to persistently increase rather than decrease Bitcoin prices. To explain this result, I exploit spreads in Bitcoin valuations across currencies and blockchain data and link increased Bitcoin demand to East Asian economies subject to capital controls, particularly China. I discuss implications for the discussion of where demand for Bitcoin stems from: its recent responses to monetary policy confirm its role as a primarily speculative asset; yet, at least historically Bitcoin seems to have derived part if its value from enabling cross-border value transfers and capital flight.

Suggested Citation

  • Karau, Sören, 2023. "Monetary policy and Bitcoin," Journal of International Money and Finance, Elsevier, vol. 137(C).
    • Handle: RePEc:eee:jimfin:v:137:y:2023:i:c:s0261560623000815
    DOI: 10.1016/j.jimonfin.2023.102880
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    5. Chen, Yan & Zhang, Lei & Bouri, Elie, 2024. "Co-Bubble transmission across clean and dirty Cryptocurrencies: Network and portfolio analysis," Journal of International Money and Finance, Elsevier, vol. 145(C).
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    7. Di Casola, Paola & Habib, Maurizio Michael & Tercero-Lucas, David, 2023. "Global and local drivers of Bitcoin trading vis-à-vis fiat currencies," Working Paper Series 2868, European Central Bank.
    8. Abakah, Emmanuel Joel Aikins & Wali Ullah, G M & Abdullah, Mohammad & Lee, Chi-Chuan & Sulong, Zunaidah, 2024. "Correlation structure between fiat currencies and blockchain assets," Finance Research Letters, Elsevier, vol. 62(PA).

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    More about this item

    Keywords

    Bitcoin; Blockchain; High-frequency analysis; Monetary policy; Proxy VAR;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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