Study Reveals Similar Drivers for Crypto and Traditional Asset Prices

Recent research spearheaded by Circle Chief Economist Gordon Liao, alongside Uniswap Labs and the Copenhagen Business School, reveals that the drivers behind cryptocurrency prices are remarkably similar to those influencing traditional asset prices. The study provides a deeper understanding of how monetary policy and other financial factors play pivotal roles in the crypto market, according to Circle.

Key Findings from the Research

The research decomposes asset prices into three main components: monetary policy, broad market risk premium, and crypto-specific demand. Analyzing data since early 2019, the study found that contractionary monetary policy was responsible for over two-thirds of Bitcoin’s (BTC) significant drop in 2022. This finding underscores the influence of traditional financial policies on digital asset prices.

Moreover, the research delves into various significant events, such as the FTX bankruptcy, Bitcoin ETF announcements, and the financial turmoil caused by the COVID-19 pandemic. These event studies further illustrate that cryptocurrency price movements often mirror those of traditional asset classes in response to global financial market dynamics.

Bitcoin Return by Shock Since 2019

The study also presents a detailed analysis of Bitcoin's returns in response to various shocks since 2019. This includes both market-wide shocks, such as changes in U.S. monetary policy, and crypto-specific events, providing a comprehensive view of the factors influencing Bitcoin's price.

Stablecoins and Crypto Adoption

Extending its analytical model, the research incorporates stablecoins, deemed safe assets within the crypto ecosystem. By examining changes in stablecoin market capitalization, the study differentiates between shocks driven by variations in crypto adoption and those driven by crypto-risk premiums.

The findings suggest that cryptocurrency prices may be more logical and predictable than previously perceived. This revelation could reshape how investors and market analysts approach crypto market dynamics, bridging the understanding gap between digital and traditional financial markets.

For more detailed insights, the full research paper is available on Circle's official blog.