In a recent publication, the research firm DataTrek summarized the findings of an academic paper titled "What Drives Crypto Asset Prices?" by researchers Adams, Libert, and Liao. This paper examines three key factors influencing the prices of virtual currencies, with a particular focus on Bitcoin.
The cumulative returns of Bitcoin since 2019 are represented in black, while the demand for this cryptocurrency is shown in pink, the impact of the U.S. Federal Reserve's monetary policy in purple, and the risk appetite of financial markets in blue. It is clear that each of these three factors has played a significant role at different times in the evolution of Bitcoin. For instance, Bitcoin faced pressures during the pandemic crisis (due to a decline in risk appetite) and during the monetary tightening in 2022, while it benefited from increased demand in 2021.
The next image compares the contribution of these factors to Bitcoin's performance with that of two more traditional financial assets: the U.S. 2-year Treasury bond and the S&P 500 index. While the Fed's monetary policy and risk appetite explain about half of the fluctuations in the bond and the benchmark index, they account for less than 10% of Bitcoin's price variations. In contrast, demand for Bitcoin explains more than 80% of its returns over the period studied.
In conclusion, the data shows that, although excessive market volatility or rate shocks may negatively impact Bitcoin's price, the cryptocurrency generally follows a distinct trajectory. The most compelling reason to hold Bitcoin lies in the belief that it will gain popularity as a non-correlated financial asset, similar to gold in some respects.
Comments