How the Cryptocurrency Market is Connected to the Financial Market

Abstract

This paper examines how the cryptocurrency market interacts with traditional financial markets through reserve-backed stablecoins. Using daily data from 2020 to 2021, I show that increases in the issuance of major stablecoins, Tether and USD Coin, significantly raise commercial paper issuance and lower commercial paper yields the next day, indicating substantial excess demand for short-term safe assets. Exploiting differences in stablecoin peg mechanisms and using algorithmic stablecoin issuance as an instrument, I establish a causal link between stablecoin activity and commercial paper market outcomes. The results demonstrate that rapid growth in stablecoins has meaningful implications for the pricing and supply of traditional private money.

Keywords: cryptocurrency, stablecoin, safe asset, private money

JEL Classification: E40, E50, G23