Prices of cryptocurrencies are less affected by macroeconomic factors than prices of more traditional financial assets. However, an indirect correlation between digital assets and macroeconomics can still be seen.
Analysts at financial market ratings provider S&P Global analyzed the correlation between cryptocurrencies and macroeconomics. In the report, the authors couldn’t come to an unambiguous conclusion regarding the dependence of prices of digital assets on changes in macroeconomic factors. However, they revealed that such a correlation may exist.
The report states that determining a direct correlation between the volatility of the crypto market and macroeconomic factors is difficult for a number of reasons, such as:
- falling prices of digital assets, which are independent of macroeconomics in general and are only relevant to the crypto market;
- the wider adoption of cryptocurrencies in some emerging markets with high inflation and rapid depreciation of local fiat currencies;
- the short history of the industry’s development.
S&P Global analysts found that cryptocurrencies differ significantly from traditional financial assets, which are strongly influenced by macroeconomic factors, such as interest rates and inflation. Thus, the key drivers of changes in the prices of crypto-assets are:
- user confidence;
- the level of mass adoption of the technology;
- the development of the regulatory framework;
- improvements in technology;
- supply and demand;
- liquidity.
The report also states that while rising interest rates can negatively impact cryptocurrency markets, the unique characteristics of the crypto economy play a large role in pricing. For example, waves of rising and falling crypto prices correlate with both periods of loose monetary policy and periods of significant tightening.
According to analysts at the International Monetary Fund (IMF), the correlation between virtual assets and financial markets is growing rapidly.
The report also noted an obvious negative correlation between cryptocurrencies and the strength of the U.S. dollar. However, a more detailed study didn’t confirm the causal relationship and, consequently, the direct dependence of crypto quotes on the dollar.
The report’s authors, having studied the cryptocurrency ecosystem and analyzed its connection to key macroeconomic factors, came to the following conclusions:
- Crypto-assets are indirectly influenced by macroeconomic changes, along with other factors such as technology developments and market sentiment.
- The correlation between the crypto market and macroeconomic indicators may become stronger and more consistent with traditional financial assets as more institutional investors turn to crypto.
- Consequently, contagion risks between traditional and cryptocurrency assets may increase.
- Regulators will continue to pay increased attention to the risks associated with cryptocurrencies.
- The correlation between the rapidly evolving crypto ecosystem, the global economy, and financial markets will evolve.
Bitcoin’s quotes were immune to most macroeconomic factors at the end of 2022, even though the first cryptocurrency and tech stocks continued to trade in tandem.
