How the Cryptocurrency Market is Connected to the Financial Market

Abstract

The cryptocurrency market is connected to the traditional financial market through reserve-backed stablecoins. A one standard deviation ($330 million) increase in the issuance of major stablecoins (Tether and USD Coin) on a given day results in an 11% increase in the commercial paper issuance quantity, an 18 basis point decrease in the commercial paper yield, and a 15 basis point decrease in the Treasury yield the following day. This shows that the exponential growth of stablecoins created an excess demand for short-term money-like safe assets. I also study the fiat cryptocurrency market's effect on the financial market.

Keywords: cryptocurrency, stablecoin, safe asset, private money

JEL Classification: E40, E50, G23