We have witnessed incredible growth in the crypto market during the pandemic, while also observing a very strong correlation between cryptocurrencies and traditional risk assets. Since May 2020, Bitcoin’s movement has been highly correlated with S&P 500 volatility at the 120-day and 240-day levels. At the shorter level, Bitcoin’s 30-day correlation with the S&P 500 hit nearly 0.8 on May 6, 2022, the highest level since July 2017.
With U.S. inflation hitting a 40-year high of 8.6% in May due to coronavirus lockdowns, rising energy prices and broader price pressures, the Federal Reserve expressed a strong intent to tighten monetary policy in its recent news conference. In his most hawkish speech so far in May 2022, Fed Chairman Jerome Powell said: “What we need to see is inflation coming down in a clear and convincing way, and we’ll keep going until see that.”
Uncertainty over monetary policy, and fears of a recession, keep reminding investors of the old adage: “Sell in May and run away”. Amid such predicaments, investor debate quickly escalates over whether Bitcoin remains a store of value, or is simply a risky investment.
BTC price and S&P 500 historical chart
Multi-time horizon tracking correlation between S&P 500 index and Bitcoin price
We analyze the reaction of the U.S. stock market (measured by the S&P 500) and the two most representative cryptocurrencies (Bitcoin and Ethereum) to recent events of U.S. monetary policy adjustment. In order to observe and quantify the response of each asset to each monetary policy adjustment event, we use the most classic event research model: the constant mean model, the estimation window is set to 250 days, and the event window ( event window) is set to 21 days (10 days before and after the event).
Regarding the selection of monetary policy control events, we are based on two criteria: whether key monetary policy decisions are made on that day, and whether investor attention as measured by the Google Search Index peaks on that day. Based on this, a total of three events were selected for this study, namely:
May 4, 2022 – The Federal Reserve raises interest rates by 50 basis points, and the Google search index for the keyword “rate hike” peaks;
March 16, 2022 – The Federal Reserve raises interest rates by 25 basis points, and the Google search index for the keyword “rate hike” peaks;
January 26, 2022 – At the first FOMC meeting of the year, the Google search index for the keyword “Federal Reserve” peaked.
According to our model, the S&P 500 and both cryptocurrencies were affected by the 50bps rate hike announced by the Federal Reserve on May 4. Notably, the S&P 500 experienced a statistically significant sell-off pattern in the ten days leading up to May 4, 2022, lasting until the end of the rate hike event window. However, Bitcoin and Ethereum have not seen the same sell-off pattern. The two cryptocurrencies only came under a lot of selling pressure after the exact rate hike date.
For the event of a 25bps rate hike on March 16, 2022, only the S&P 500 witnessed a statistically significant loss of profits prior to the event. Neither Bitcoin nor Ethereum recorded a statistically significant loss of profits.
For the first FOMC meeting of the year, which takes place on January 26, 2022, both the S&P 500 and Ethereum experienced a statistically significant loss of profits during the (-5, 1) event window, while Bitcoin showed prior to the event. Recovering ability – Considering that this event is a timed FOMC meeting, we use the term “recovering ability” here.
Price Responses of Three Assets to Three Monetary Policy Adjustment Events
(The horizontal axis represents the number of days before and after each event; the blue line represents the cumulative abnormal return of each asset; the blue bar represents the abnormal return of the asset per event; the shaded area represents the 95% confidence t-test calculation interval)
Overall, Bitcoin’s historical performance over the three given rate hike event windows suggests that the No. 1 cryptocurrency, Bitcoin, is better able to moderate monetary policy control events than the S&P 500 and Ethereum. impact. A plausible explanation is that a significant portion of investors have been confident in Bitcoin’s store of value properties and inflation-hedging narrative, choosing to hold Bitcoin for the long term even if prices of other risk assets collapsed.
Bitcoin’s on-chain statistics cross-validate this conclusion. Addresses tagged as “little shrimp” (<1 BTC) and “big whales” (>10,000 BTC, excluding exchanges and miners) have been actively moving since prices dropped into the $25,000-$32,000 range Accumulate Bitcoin. According to Glassnode data, this accumulation has been happening over the past two months while Bitcoin is operating at a low price.
What can we expect from now on? As U.S. inflation continues to accelerate, the Fed will accelerate its pace of cooling the economy, whether Powell announces a 50 or 75 basis point rate hike after Wednesday’s meeting. Some analysts are looking for signs that Bitcoin has bottomed. Our analysis does not answer whether “buy the current dip” is a good bet, although the 30-day-level correlation between Bitcoin and the S&P 500 has shown signs of decline, it is uncertain whether the correlation is will recover and how. In fact, our research shows that Bitcoin’s store of value properties persist despite experiencing massive market cap growth and exhibiting contemporaneous volatility with other risky assets. Fidelity Digital Assets stated in its latest research article that “if the economy hard landing, we think Bitcoin will respond positively”. As always, Bitcoin’s long-term narrative will not be easily derailed by another price crash. Bitcoin “true believers” will still stick to their original aspirations.
Appendix: Cumulative Abnormal Returns Calculated Based on the Constant Mean Model and Daily Bitcoin Price Data Before and After the Three Monetary Policy Adjustment Events of 2022/5/4, 2022/3/16 and 2022/1/26
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/babel-finance-a-comparative-study-on-the-performance-of-the-stock-market-and-bitcoin-before-and-after-the-fed-raises-interest-rates/
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