How the Cryptocurrency Market is Connected to the Financial Market

37 Pages Posted: 13 May 2022 Last revised: 30 Jun 2022

See all articles by Sang Rae Kim

Sang Rae Kim

Yale University - Department of Economics

Date Written: May 7, 2022

Abstract

The cryptocurrency market is connected to the traditional financial market through reserve-backed stablecoins. A one standard deviation ($320 million) increase in the issuance of major stablecoins (Tether and USD Coin) on a given day results in a 10.7% increase in the commercial paper issuance quantity, a 20 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 such as commercial paper and Treasury. I also explore the fiat cryptocurrency market's effect on the commercial paper market. A one standard deviation increase in the market capitalization growth of major fiat cryptocurrencies (Bitcoin, Binance Coin, and Ethereum) on a given day results in an 11.9% decrease in the commercial paper issuance quantity, a 20 basis point increase in the commercial paper yield, and a 18 basis point increase in the Treasury yield the following day. This result suggests that investors exchange stablecoins for fiat cryptocurrency when the fiat cryptocurrency market is doing well, lowering the demand for stablecoins and thus commercial paper.

Keywords: cryptocurrency, stablecoin, safe asset, private money

JEL Classification: E40, E50

Suggested Citation

Kim, Sang Rae, How the Cryptocurrency Market is Connected to the Financial Market (May 7, 2022). Available at SSRN: https://ssrn.com/abstract=4106815 or http://dx.doi.org/10.2139/ssrn.4106815

Sang Rae Kim (Contact Author)

Yale University - Department of Economics ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

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