S&P Global Attempts to Assess Macro Sensitivity of Crypto Assets

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Rating provider S&P Global has examined whether or not there is a relationship between crypto assets and the macro economy in a new report. Its conclusion is perhaps firm and the details are complex, mainly due to idiosyncratic events such as the crypto winter, geography and the short history of the industry.

Crypto assets have a different value proposition to traditional assets and different performance drivers, the S&P report notes in its introductory paragraphs, but the interdependence of the crypto ecosystem and the macroeconomy is inescapable. S&P analysts compared the S&P Cryptocurrency Broad Digital Market Index (BDMI) with other financial indicators to assess the extent of this interconnectedness in five areas.

Crypto assets are not exempt from the effect of macroeconomic shifts, according to the report, but the role that idiosyncrasy plays in the crypto economy is significant. For example:

In general, crypto markets have performed well during periods of expansionary monetary policies, although we are unable to establish a causal relationship. Some of the big swings in cryptocurrencies have taken place as a result of factors that are not directly related to monetary policy, such as the collapse of the FTX.

Cryptos relationship to recession expectations is also very specific, although the variables differ. In this case, the location of the users and the stability of the local fiat currency are factors. The attractiveness of crypto assets depends on the performance of fiat. Nonetheless, the report noted the launch of asset management products that include crypto assets tied to the perceived ability of cryptos to withstand economic shocks in general.

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The image of crypto as an inflation hedge is unclear. This is a complex subject, and the data may be too short to approach it with confidence, the authors wrote. Again, geography and idiosyncrasy are factors here, they said, as crypto’s resistance to inflation may be a driver of its popularity in emerging markets with unstable fiat currencies. The authors also noted that cycles in the crypto market sometimes have causes unrelated to macroeconomics.

Analysts have written with more certainty about the relationship between crypto assets and dollar strength. There is an apparent negative correlation between them, but further examination did not confirm the possibility of causation. Correlation is no substitute for causation, according to the report.

Cryptos reaction to financial stress and market volatility has been demonstrated against the CBOE Volatility Index, also known as the Fear Index, according to the report. As fear of instability grows in the mainstream economy, crypto asset prices are falling. The March banking crisis caused some stablecoins to disappear, and crypto-friendly banks are understandably exposed to crypto idiosyncrasies, analysts noted.

Considering that many crypto proponents cite macroeconomic factors, such as crypto’s resistance to inflation, as its main strengths, the reports’ lack of firm conclusions is illuminating in itself. Analysts have speculated that the nexus between macroeconomics and crypto assets could increase with greater institutional adoption of crypto.

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