Digital assets are often considered a distinctive asset class, independent of other financial instruments. However, recent analysis from S&P Global indicates that cryptocurrencies might not be as isolated from broader economic factors as previously believed. Among the macroeconomic factors considered in the study, market volatility had the most significant impact on the crypto market.
According to S&P Global, traditional financial stress and market volatility scenarios have a strong correlation with declining crypto prices. This suggests a potential contagion risk where disruptions in the traditional financial market might overflow into the crypto market. The declaration of COVID-19 as a global pandemic by the World Health Organization in March 2020 is a prime example of this effect on digital assets. During that period, Bitcoin suffered a massive 39% drop in value – one of the most prominent single-day losses in its history.
It is worth noting that despite these macroeconomic fluctuations, Bitcoin has consistently upheld its value, reinforcing its appeal among investors. The robust price trends exhibited by Bitcoin reveal that investors persistently favor it as an independent asset, according to Alex Adelman, CEO and co-founder of Lolli.
On the other hand, some argue that financial stress in the banking sector might be a tailwind for cryptocurrencies. Speaking in terms of monetary and fiscal policy impacts, S&P Global’s research found that these policies can also have a significant effect on crypto. Expansionary monetary and fiscal policies increase disposable income and boost investment in riskier assets like cryptocurrencies.
Conversely, the possibility of more stringent monetary policies, such as interest rate hikes, can elevate financial stress and market volatility. This, in turn, can contribute to the decline in digital asset prices. Unprecedented levels of monetary easing by central banks worldwide since the 2008/09 financial crisis have resulted in a record-high money supply, which has typically moved in tandem with Bitcoin’s price.
In conclusion, while digital assets are often perceived as a standalone asset class, evidence suggests that they may not be entirely immune to the influence of macroeconomic factors. Market volatility, in particular, can have a noteworthy impact on cryptocurrency prices, presenting potential risks and opportunities for investors. The resilience and value retention of Bitcoin in the face of market turbulence underscore its longstanding appeal to investors seeking a distinct asset class. Nonetheless, vigilance is required as the landscape continues to evolve and adapt to new challenges in the global economy.
Source: Blockworks
