Sebastian Sinclair


<p>Digital assets are sometimes hailed as a unique asset class that moves independently of others, but analysis from S&amp;P Global suggests crypto is not insulated from broader economic influences.</p>



<p>Of those macroeconomic factors, the impact of global market volatility was most pronounced.</p>



<p>In its <a href="https://www.spglobal.com/_division_assets/images/special-editorial/are-crypto-markets-correlated-with-macroeconomic-factors/are-crypto-markets-correlated-with-macroeconomic-factors.pdf?utm_medium=email&amp;utm_source=newsletter&amp;utm_campaign=newsletter_axioscryptocurrency&amp;utm_term=undefined&amp;utm_content=undefined&amp;gclid=undefined">report</a>, titled “Are crypto markets correlated with macroeconomic factors?” and published this month, the firm tries to address some of the industry’s biggest themes, such as whether crypto can serve as a hedge against inflation and the impact of the strength or weakness of the US dollar.</p>



<p>It also attempts to address the potential for financial stresses and market volatility to spill over into the industry, as well as the impact of monetary policy.</p>



<h2 class="wp-block-heading">Traditional financial stress and market volatility</h2>



<p>The study found a correlation between increased financial stress, market volatility and declining crypto prices. This suggests a potential contagion risk, where upheavals in traditional finance could spill over into the crypto market.</p>



<p>S&amp;P pointed toward two major macroeconomic impacts on digital assets including when the World Health Organization declared COVID-19 a global pandemic in March 2020.&nbsp;</p>



<p>Around that time, on March 12, bitcoin shed an incredible 39% — one of the worst single-day losses in the asset’s history.</p>



<p>Other incidents have also highlighted the contagion risks from traditional finance. That included this year’s banking crisis, when <a href="https://blockworks.co/news/circle-stand-behind-usdc">the failure of SVB briefly forced</a> two major stablecoins USDC and DAI to depeg roughly 13%.</p>



<p>Crypto prices have been found to have an inverse relationship with the VIX and OVX indexes, both used as a measure for volatility, suggesting that as market fear and volatility increase, crypto prices tend to fall.</p>



<p>Though, as current macroeconomic factors trends take shape, not all agree on their significance.</p>



<p>“Bitcoin’s price is showing resilience amid ongoing economic uncertainty, remaining strong and steady even with open questions around the debt ceiling, inflation, and upcoming interest rate decisions,” Alex Adelman, CEO and co-founder of Lolli told Blockworks via email.</p>



<p>The robust price trends exhibited by bitcoin reveal that investors persistently favor it as an independent asset, he said. Despite macroeconomic fluctuations, the asset has consistently upheld its value, reinforcing its appeal among investors, according to Adelman.</p>



<p>Others have argued that <a href="https://blockworks.co/news/federal-reserve-policy-confidence-banks">banking sector stress</a>, specifically, <a href="https://blockworks.co/news/banking-sector-versus-defi">may be a tailwind</a> for crypto.&nbsp;</p>



<h2 class="wp-block-heading">Monetary and fiscal policy impacts</h2>



<p>In its research, S&amp;P found the impact of monetary policy on crypto can also be significant. Expansionary monetary and fiscal policies that increase disposable income can boost investment in “risk on” assets like crypto.&nbsp;</p>



<p>Conversely, the prospect of tighter monetary policy, such as interest rate hikes, can increase financial stress and market volatility which, in turn, can send digital assets falling.</p>



<p>Unprecedented levels of monetary easing by central banks globally since 2008/09 have inflated the money supply to record levels, which have typically moved in tandem with bitcoin’s price.</p>



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Deciphering Crypto Macro Correlations, S&P Global Highlights Volatility


<p>A shift away from quantitative tightening and a fresh expansion of the US Federal Reserve’s balance sheet has industry majors bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) and ether (<a href="https://blockworks.co/price/eth">ETH</a>) riding high.</p>



<p>Both assets are now up 69% and 49.5% on a year-to-date basis to around $28,000 and $1,800&nbsp; respectively, <a href="https://www.blockworksresearch.com/assets">Blockworks Research data</a> shows. In just the past couple weeks, they have rallied some 35% and 26% on the back of Silicon Valley Bank’s <a href="https://blockworks.co/news/bitcoin-momentum-store-of-value-banking-turmoil" target="_blank" rel="noreferrer noopener">historic failure</a>.</p>



<p>The crypto market performance is now vastly outstripping tech and growth stocks listed on the Nasdaq exchange by more than five times over the same period.</p>



<p>“Crypto, at a macro level, trades on the perceived fundamentals of the money supply outlook more so even than pure market beta,” Rich Falk-Wallace, CEO of data analytics firm Arcana told Blockworks. “As the money supply picture has changed overnight, so have crypto sector asset prices.”</p>



<p>Last year’s regime of quantitative tightening was a more significant factor affecting prices than the demise of many centralized crypto firms, digital asset trading firm Cumberland said via <a href="https://twitter.com/CumberlandSays/status/1638202345346531330?s=20" target="_blank" rel="noreferrer noopener">social media</a> on Tuesday.</p>



<p><a href="https://blockworks.co/tag/ethereum-merge">Ethereum’s Merge</a> and Russia’s war in <a href="https://blockworks.co/tag/ukraine">Ukraine</a> were of lesser consequence for price, the firm said.</p>



<h2 class="wp-block-heading">Bank liquidity driving bitcoin adoption</h2>



<p>Now, as the Fed has taken swift action to prop up the US banking sector through its newly created Bank Term Funding Program in a step designed to “safeguard deposits,” investors are seeking out alternatives.</p>



<p>The central bank is weighing whether to hike rates further as it attempts to wrestle with inflation, though, amid the backdrop of liquidity provisions for banks, that is proving somewhat difficult.</p>



<p>Markets are now pricing in a 25 basis point jump instead of the previously conceived 50, to be decided at the next upcoming FOMC meeting on Wednesday, according to CME Group’s <a href="https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html" target="_blank" rel="noreferrer noopener">FedWatch tool</a>.&nbsp;</p>



<p>The easing of further rate hikes would be the first time the Fed has made such a move since it began its aggressive campaign in March of last year.</p>



<p>Sunday also saw the <a href="https://www.bbc.com/news/business-65010255" target="_blank" rel="noreferrer noopener">announcement</a> from central banks around the world to bolster liquidity provisions in US dollars as they sought to soothe the crisis of confidence in the global financial system.</p>



<p>“None of this is exactly quantitative easing the way we’re used to it, but it’s clear that quantitative tightening is not just ending but headed in the other direction,” Cumberland <a href="https://twitter.com/CumberlandSays/status/1638202348936871940?s=20" target="_blank" rel="noreferrer noopener">tweeted</a>.</p>



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe class="wp-embedded-content" sandbox="allow-scripts" security="restricted" title="Interactive or visual content" src="https://flo.uri.sh/visualisation/13155519/embed#?secret=kF71i4J3O8" data-secret="kF71i4J3O8" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div><figcaption class="wp-element-caption"><em>Bitcoin and ether are easily outperforming major indexes so far this year</em></figcaption></figure>



<p>Whatever you term it, the actions are translating to further upside for digital assets, Glassnode said in its weekly <a href="https://www.youtube.com/watch?v=5tH_66pz0Us&amp;ab_channel=glassnode" target="_blank" rel="noreferrer noopener">video report</a>, Tuesday.</p>



<p>Exploring the underlying strength of the trend, Glassnode pointed to several on-chain activity metrics in an attempt to analyze the fundamentals backing the rally.</p>



<p>Looking at the transaction counts, new addresses and new entities for bitcoin over a monthly basis versus its yearly average performance, Glassnode said the data was showing a “very healthy uptick.”</p>



<p>“Bitcoin has seen one of the most explosive weekly rallies in history,” Glassnode wrote in a slide at the end of its presentation. While there were some signs of profit-taking at play, it remains “relatively light” with respect to older coins, hinting at a strong conviction to the upside, it said.</p>



<p>Cumberland agrees: “The flow we are seeing on the OTC desk is reflecting the new reality. It has been extremely focused in BTC and ETH, and we’re seeing very little profit-taking, despite the fact that BTC is up 70% on the year; our flow ratio right now shows roughly twice as many buyers as sellers.”</p>



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Bitcoin Price Rally Aligns With ‘Healthy Uptick’ in On-chain Metrics

Macauley Peterson

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        <ul>
                <li>The Bank of England raised interest rate by 15 basis points to 0.25%, in a near unanimous vote</li>
                <li>The European Central Bank leaves rates unchanged, but will taper its government bond purchases</li>
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<p>The Bank of England’s monetary policy committee (MPC), decided on Thursday to raise its Bank Rate to 0.25%, according to <a href="https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2021/december-2021" target="_blank" rel="noreferrer noopener">the committee’s minutes</a>, in a bid to dampen inflation. The 12-month CPI rate jumped from 5.1% in November, up from 3.1% in September, and the highest level since September 2011. The Committee voted by an eight to one margin in favor of the rate hike.</p>



<p>The move comes a day after the US Federal Reserve’s analogous group left rates unchanged but also <a href="https://cms.blockworks.co/fed-gets-hawkish-doubles-taper-signals-three-rate-hikes-in-2022/" target="_blank" rel="noreferrer noopener">moved to tighten monetary policy</a> by decelerating its asset purchase program more quickly than earlier planned.</p>



<p>Like the Fed, the Bank of England (BoE) policymakers expect that upward pressure on CPI inflation is driven primarily by supply disruption and should dissipate over time, returning closer to the committee’s long-term 2% target rate.</p>



<p>The MPC notes that the Omicron Covid-19 variant is spreading rapidly in the UK, but it’s medium-term economic effects remain unclear, while inflation has risen faster than anticipated.&nbsp;</p>



<p>The International Monetary Fund (IMF) UK staff weighed in with <a href="https://www.imf.org/en/News/Articles/2021/12/14/united-kingdom-staff-concluding-statement-of-the-2021-article-iv-mission" target="_blank" rel="noreferrer noopener">a policy statement</a>, Tuesday, targeted squarely at the BoE, warning against “inaction bias, in view of costs associated with containing second-round impacts.”</p>



<p>Unemployment in the UK is expected to be 4% in November, down 0.5%, indicating the labor market remains tight.</p>



<h3 class="wp-block-heading"><strong>ECB calls for “flexibility”</strong></h3>



<p>In the Eurozone, inflation surged to 4.9% in November, the highest level ever recorded, <a href="https://ec.europa.eu/eurostat/documents/2995521/11563387/2-30112021-AP-EN.pdf" target="_blank" rel="noreferrer noopener">according to Eurostat</a>.</p>



<p>At Thursday’s <a href="https://www.ecb.europa.eu/press/pressconf/2021/html/ecb.is211216~9abaace28e.en.html" target="_blank" rel="noreferrer noopener">European Central Bank (ECB) policy meeting</a> in Frankfurt, Germany, ECB President Christine Lagarde announced a scaling back of asset purchases under the pandemic emergency purchase program (PEPP), and its full discontinuance in March 2022.</p>



<blockquote class="wp-block-quote"><p><strong>“We judge that the progress on economic recovery and towards our medium-term inflation target permits a step-by-step reduction in the pace of our asset purchases over the coming quarters. But monetary accommodation is still needed for inflation to stabilise at our two per cent inflation target over the medium term,” Lagarde said in her prepared remarks.</strong></p></blockquote>



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<p>The key ECB interest rates were left unchanged. Similar to the Fed’s policy, the ECB plans to wind down net asset purchases prior to raising rates.</p>



<p>Eurozone inflation is expected to remain elevated next year, but to decline over the course of the year, mirroring the outlook in both the UK and the US.</p>



<p>The US dollar weakened following the BoE and ECB announcements. The DXY, an index representing the USD against a basket of major foreign currencies, fell almost 0.5% in the two hours following the policy updates, but recovered by midday in New York.</p>




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