The Crypto Cycle and Institutional Investors

Abstract

We examine aggregate fluctuations in crypto markets and their relationship to global equity markets and US monetary policy. First, we document that changes in the correlation between crypto and global equity markets can be explained by changes in the participation of institutional investors in crypto markets. Second, we find that US monetary policy significantly affects crypto markets, but only when the participation of institutional investors is high. Finally, we rationalize our empirical results in a heterogeneous-agent model with time-varying aggregate risk aversion, in which large investors holding both asset classes create a direct link between them.

Keywords: Institutional Investors, Crypto Assets, US Monetary Policy.