Crypto market is ‘immune to general monetary policy,’ study reveals

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 paper ‘International 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.

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.