Source: Babel Research
By Yuanming Qiu (Research Analyst at Babel Finance) & Robbie Liu (Head of Research at Babel Finance)
During the pandemic, we have witnessed incredible growth in the cryptocurrency market, but also observed an extremely strong correlation between cryptocurrencies and traditional risk assets.
Since May 2020, Bitcoin’s movement has been highly correlated with S&P 500 volatility at the 120-day and 240-day levels. At the shorter level, Bitcoin’s 30-day correlation with the S&P 500 hit nearly 0.8 on May 6, 2022, the highest level since July 2017.
U.S. inflation hit a 40-year high of 8.6% in May due to coronavirus lockdowns, rising energy prices and broader price pressures. strong intent. In his most hawkish speech so far in May 2022, Fed Chairman Jerome Powell said: “What we need to see is a clear and convincing decline in general usage rates, and we’ll keep pushing until we see that.”
Uncertainty about monetary policy, and fears of a recession, keep reminding investors of the old adage: “Sell in May and run away”. In the midst of this predicament, the debate quickly heats up over whether Bitcoin remains a store of value, or is simply a risky investment.
We analyze the reaction of the U.S. stock market (measured by the S&P 500) and the two most representative cryptocurrencies (Bitcoin and Ethereum) to recent events in the U.S. monetary policy adjustment. In order to observe and quantify the response of each asset to each monetary policy adjustment event, we use the most classic event research model: Constant mean Model, Estimation Window is set to 250 days, Event Window (Event Window) Window) is set to 21 days (10 days before and after the event).
Regarding the selection of monetary policy control events, we are based on two criteria: whether key monetary policy decisions are made on that day, and whether investor attention as measured by the Google Trends (search popularity) index peaks on that day. Based on this, a total of three events were selected for this study, namely:
1) May 4, 2022 – The Fed raises interest rates by 50 basis points and the Google Trends index for the keyword “rate hike” peaks;
2) March 16, 2022 – The Fed raises interest rates by 25 basis points, and the Google Trends index for the keyword “rate hike” peaks;
3) January 26, 2022 – The first FOMC meeting of the year, the Google Trends index for the keyword “Federal Reserve” peaked.
According to our model, both the S&P 500 and the two cryptocurrencies were affected by the Fed’s announcement of a 50bps rate hike on May 4. Notably, the S&P 500 saw a statistically significant sell-off pattern in the ten days leading up to May 4, 2022, lasting until the end of the rate hike event window. However, Bitcoin and Ethereum have not seen the same sell-off pattern. The two cryptocurrencies only came under a lot of selling pressure after the exact rate hike date.
For the event of a 25bps rate hike on March 16, 2022, only the S&P 500 witnessed a statistically significant loss of profits prior to the event. Neither Bitcoin nor Ethereum recorded a statistically significant loss of profits.
For the first FOMC meeting of the year, which takes place on January 26, 2022, both the S&P 500 and Ethereum experienced a statistically significant loss of profits during the (-5, 1) event window, while Bitcoin showed prior to the event. Recovering Ability – Considering that this event is a timed FOMC meeting, we use the term “recovering ability” here.
(The horizontal axis represents the number of days before and after each event; the blue line represents the cumulative abnormal return of each asset; the blue bar represents the abnormal return of the asset per event; the shaded area represents the 95% confidence t-test calculation interval)
Overall, Bitcoin’s historical performance over the three given rate hike event windows suggests that the No. 1 cryptocurrency, Bitcoin, is better able to moderate monetary policy control events than the S&P 500 and Ethereum. impact. A plausible explanation is that a significant portion of investors have been confident in Bitcoin’s store-of-value properties and inflation-hedging narrative, choosing to hold Bitcoin for the long term even if prices of other risk assets collapse.
Bitcoin’s on-chain statistics cross-validate this conclusion. Since the price dropped to the range of $25k-$32k, it was tagged as “little shrimp” (<1 BTC) and “big whales” (holding more than 10,000 BTC, excluding exchanges and miners) Addresses have been actively accumulating Bitcoin. According to Glassnode data, this accumulation has been happening over the past two months when Bitcoin was at a low price.
What should we expect from now on? As U.S. inflation continues to accelerate, the Fed will accelerate its pace of cooling the economy, whether Powell announces an upgrade of 50 basis points or 75 basis points after Wednesday’s meeting. Some analysts are looking for signs that Bitcoin has bottomed. Our analysis does not answer whether “buy the current dip” is a good bet, although the 30-day-level correlation between Bitcoin and the S&P 500 has shown signs of decline, not sure if the correlation is will recover and how.
In fact, our research shows that Bitcoin’s store-of-value properties persist despite experiencing massive market cap growth and exhibiting contemporaneous volatility with other risky assets. Fidelity Digital Assets stated in its latest research article that “if the economy hard landing, we think Bitcoin will respond positively”. As always, Bitcoin’s long-term narrative will not be easily derailed by another price crash. Bitcoin “true believers” will still stick to their original aspirations.
Appendix: Cumulative Abnormal Returns Measured Based on Constant Mean Model and Daily Bitcoin Price Data Before and After the Three Monetary Policy Adjustment Events on May 4th, March 16th, and January 26th.
(The above content is excerpted and reprinted with the authorization of partner Mars Finance, original link | Source: Babel PayPal)
Disclaimer: The article only represents the author’s personal views and opinions, and does not represent the objective point and position of the block. All content and opinions are for reference only and do not constitute investment advice. Investors should make their own decisions and transactions, and the authors and blockers will not be responsible for the direct and indirect losses caused by investors’ transactions.
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