By Marco Babic
ZURICH (MaceNews) – The systems designed around crypto tokens, such as Bitcoin, should be independent of central banks and commercial banks because it is their actions that determine the value of the underlying means of payment, the Bundesbank said in its monthly report for September.
Bitcoin was introduced in 2008 with the aim of making a decentralized and anonymous electronic payment system possible and is “increasingly attracting the interest of a broader class of investors and institutional investors,” the report said.
Investor interest stems from “often increased valuation levels,” but because the coins don’t possess inherent value or backing from deposited securities, “speculative exaggeration is often suspected” in the valuations, according to the Bundesbank.
In its analysis, the Bundesbank said there are expectations a loose monetary policy can increase the value of crypto tokens. Paradoxically, “the effect that monetary policy has on assets is fundamentally of great interest,” but at the same time there is the hope that crypto tokens can avoid the “risks associated with conventional monetary policy.”
By design, the amount of crypto coin is limited in order to maintain scarcity to preserve long term value.
In terms of monetary policy, the supply issue is problematic because it doesn’t allow for “discretionary intervention,” in the way that money issued by a central bank “can adjust the monetary policy orientation largely at their own discretion and thus influence the value of the currency they issue with, for example, the aim of maintaining price stability.”
Because monetary policy also affects exchange rates, the crypto coin exchange rate “would then benefit particularly strongly from a monetary policy that is perceived as excessively expansionary.”
Furthermore, “precisely because crypto tokens do not promise a flow of payments and are not used prominently as a means of payment, their high market prices can most likely be explained by a monetary glut of liquidity that drives up the market prices of all possible risky assets,” the report said.
Below is a translated excerpt from the Bundesbank’s monthly report on crypto coin price activity surrounding ECB announcements:
If, for example, the prices of stocks rise immediately after a monetary policy announcement has been made, while they move sideways before and afterwards, it is plausible that the rise can primarily be attributed to the monetary policy impulse. The fact that the prices of bonds, stocks and foreign currencies often react directly and significantly to monetary policy decisions is well proven in empirical research.
Initial indications of an effect of the Eurosystem’s monetary policy on crypto tokens could therefore be obtained by extending such an analysis to token prices as shown below. The decisive factor here is the currency in which crypto token prices are expressed. Because, as stated above, the effect on euro prices is hardly surprising and Bitcoin is mainly traded against US dollars, the tokens are always expressed in US dollars in the following analysis.
First, we take a look at the average return volatility on Bitcoin and other assets around monetary policy decisions of the Governing Council.
The period under review begins 15 minutes before the ECB press release is published at 1:45 p.m. and lasts until 75 minutes after the start of the subsequent press conference at 2:30 p.m. All in all, it ranges from 1:30 p.m. to 3:45 p.m. It turns out that Bitcoin prices, which are already prone to fluctuations, are on average around 10% more volatile during this period on days when monetary policy announcements are made than on normal afternoons without decisions by the Governing Council.
This result could indicate that monetary policy decisions are also important for the crypto token markets because they lead to price changes that are unusually strong. However, the difference between days with and without monetary policy announcements is not statistically significant as long as days with extreme value movements are also taken into account.
A similar comparison can be made with the second characteristic of crypto tokens discussed above: their low correlation with the market prices of other assets. Correlation coefficients between the returns of Bitcoin and those of stock indices, gold and the euro-US dollar exchange rate make it clear that the relationship to monetary policy announcements by the Governing Council is stronger than usual in the short period described.
In summary, the results so far provide an indication that monetary policy decisions could also be important for crypto tokens such as Bitcoin. At the same time, the relative influence of monetary policy on the market prices of stocks, precious metals and foreign currencies seems at first glance to be more significant.
However, the previous analysis only takes into account the immediate reaction of different asset prices to monetary policy announcements. The already very high price volatility of crypto tokens could make it difficult to demonstrate a clear monetary policy effect in short periods of time.
The markets for crypto tokens are also less liquid than those of many conventional assets, which could limit the informative value of an analysis based on high-frequency data. The question therefore arises whether a systematic relationship can also be established over longer periods of time and whether monetary policy impulses can explain a quantitative increase in crypto token prices over time.