What Uncertainties Matter to Cryptocurrencies?

Abstract

We contribute to financial literature by identifying economic uncertainties salient to the price dynamics of cryptocurrencies. To measure this relationship, we examine the common stochastic trends between cryptocurrencies and major text-based uncertainty indices — categorical and broad — from the US and major developed economies from 2015 to 2021. Results from static factor tests using high-dimensional stochastic volatility factor models indicate trivial associations between global uncertainties and the crypto-sphere. Further investigation from dynamic implied correlation matrices, however, suggest that this phenomenon has undergone several changes over time. In fact, ties between US-based monetary policy uncertainties were non-trivial between 2015 to 2016. Following the post-Trump election bull run, the association faded, before reappearing upon the advent of the COVID-19 pandemic. Uncertainties surrounding some decisions by US government register minor significance. Uncertainties from European countries and China show some influence, with Japan registering an inverse relationship. Causality tests largely approbate these results, while underscoring an important point that while the pricing dynamics of cryptocurrencies may be independent from global uncertainties, their second moments remain attached to global trends. In sum, volatility in the crypto market is impacted by global uncertainties; prices are less so.

Keywords: Bitcoin, Cryptocurrency, Ethereum, Economic Uncertainty, Policy Uncertainty, VIX, Blockchain, Monetary Policy, Volatility, Stochastic Volatility, Causality