Impact of monetary policy on bitcoin prices

Sören Karau of Bundesbank in this paper analyses impact of US and Europe mon policy on price of bitcoin.

The author considers Bitcoin as a digital gold. In case of high inflation, people buy gold as a hedge for inflation. So when central bank tightens policy to fight inflation, demand for gold should decline.

People should be behaving similarly in case of bitcoin too. We see this in case of ECB but not for Federal Reserve:

Bitcoin was conceptualized in response to perceived shortcomings in the monetary and financial system, not only related to large financial institutions but also to discretionary decision making in monetary policy. Using high-frequency data and a weekly proxy VAR model, I study the impact of monetary policy on Bitcoin.

The paper shows that monetary shocks have sizable effects on Bitcoin prices, but that these differ in sign: a disinflationary monetary tightening by the ECB lowers valuations – consistent with the notion of Bitcoin as a digital gold –, whereas a Fed tightening increases Bitcoin prices. I document similar differences with respect to central bank information shocks and explore potential explanations by studying various aspects of the Bitcoin ecosystem. Exploiting both differences in Bitcoin valuations across currencies and blockchain transaction data, the paper shows that the increased demand for Bitcoin following a US monetary tightening is primarily driven by emerging markets.

I argue that this likely reflects the technological and institutional particularities of Bitcoin that make it sought after as global digital cash when international economic and financial conditions deteriorate.

Interesting findings…

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