Monetary Policy and Cryptocurrencies

Abstract

I study the impact of monetary policy on cryptocurrency markets. Using high-frequency data and a weekly proxy VAR, the paper shows that monetary shocks have sizable effects on Bitcoin prices, but that these differ in sign: a 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 various other aspects of the Bitcoin ecosystem and explore potential explanations. Exploiting both blockchain transaction data and differences in Bitcoin valuations across currencies, the paper shows that the increased demand for cryptocurrencies following a US monetary tightening seems to be primarily driven by emerging markets. I argue that this likely reflects the technological and institutional particularities of cryptocurrencies that make them sought after as international digital cash when global economic and financial conditions deteriorate.