Forget the Fed. Here are the 4 real drivers of crypto prices, says S&P.

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Crypto prices rise and fall due to factors beyond macroeconomic trends. The time of dreams

While interest rates set by the Federal Reserve, and even Internet memes, can be drivers of cryptocurrency prices, there are four forces that really move Bitcoin and differentiate it from traditional financial assets, according to the report. analysis by S&P Global Ratings.

In the short term, macroeconomic forces such as Fed decisions and economic indicators that influence monetary policy, such as inflation data or the monthly U.S. jobs report, can be seen as moving bitcoin, as are the Dow Jones Industrial Average and the S&P 500. More generally, the forces behind crypto prices are more complex, according to a team led by Cristina Polizu, chief executive of S&P Global.

Bull and bear runs in the crypto market have both coincided with periods of ultra-loose monetary policy and significant tightening, the Polizus team wrote in a recent report, but noted that while the recent rapid rise in rates of interest could have a negative impact on the crypto markets, idiosyncratic factors also seem to play an important role.

On the one hand, there is the US dollar, which according to S&P is generally inversely correlated to the prices of crypto assets. That said, the strength of the dollar itself tends to be tied to interest rates, hitting a 20-year high in 2022 amid the biggest rate hike cycle in a generation, so it may not be. not be a completely independent factor.

There is also volatility. The Polizus team said that crypto markets appear to perform very well during periods of low volatility and underperform during periods of high volatility. Amid market selloffs, Bitcoin often leads declines as traders flee riskier assets first. But that still doesn’t get to the heart of the matter.

All in all, the prices seem less affected by macroeconomic factors than the prices of more traditional financial assets, the S&P team said. Key drivers for crypto assets include market confidence, adoption, technology, and liquidity conditions.

This contrasts them with traditional financial assets, like stocks, which analysts say are heavily influenced by macroeconomic factors such as interest rates and inflation, as well as company operating profits. and broader changes in monetary policy.

This difference might not last forever, especially as the macroeconomic backdrop looms in 2023 with risks of a global recession, with even the long-awaited institutional adoption of digital assets by crypto traders as a bullish sign that is likely to change. things.

Crypto assets are not exempt from the effect of macroeconomic changes, although performance is also driven by other drivers such as technology and market sentiment, the Polizus team said. The markets relationship with macro indicators could become stronger and more in line with that of traditional financial assets as more institutional investors turn to crypto.

Write to Jack Denton at [email protected]

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