S&P Global, a rating provider, has recently conducted a study to determine the connection between crypto assets and macroeconomics. The findings, however, are inconclusive due to various factors such as idiosyncratic events, geographical disparities, and the relatively short history of the crypto industry.
While crypto assets possess distinct characteristics and performance drivers compared to traditional assets, the interconnectedness between the crypto ecosystem and macroeconomics cannot be ignored. To assess this relationship, S&P analysts examined the S&P Cryptocurrency Broad Digital Market Index (BDMI) alongside other financial indicators in five key areas.
The report acknowledges that crypto assets are not immune to the effects of macroeconomic changes, but the influence of idiosyncrasies in crypto economics is significant. For instance, the performance of crypto markets during periods of expansionary monetary policies has generally been positive, although establishing a causal relationship remains challenging. Noteworthy price swings in cryptocurrencies have also occurred due to factors unrelated to monetary policy, such as the FTX collapse.
The study highlights that crypto’s correlation with recessionary expectations is highly specific, depending on variables like location and the stability of the local fiat currency. The appeal of crypto assets often hinges on the performance of fiat currencies. However, asset management products incorporating crypto assets have emerged, driven by the perception that crypto can withstand economic shocks in general.
Regarding crypto’s role as an inflation hedge, the report states that the data available is insufficient to confidently address this complex topic. Geography and idiosyncratic factors play a role, as crypto’s attractiveness as an inflation hedge is more pronounced in emerging markets with unstable fiat currencies. The report also acknowledges that crypto market cycles can be influenced by causes unrelated to macroeconomics.
In terms of the relationship between crypto assets and the strength of the dollar, an apparent negative correlation exists. However, a closer examination does not support the possibility of causation. The report emphasizes that correlation alone cannot substitute for causation.
The study reveals that crypto assets tend to react to financial stress and market volatility, as evidenced by their correlation with the CBOE Volatility Index, also known as the “fear index.” During periods of increased instability in the traditional economy, crypto asset prices often decline. The report also mentions that the idiosyncrasies of crypto can affect stablecoins, leading to depegging, and crypto-friendly banks are naturally exposed to these idiosyncrasies.
Given that many proponents of crypto often cite macroeconomic factors, such as its resistance to inflation, as major strengths, the lack of definitive conclusions in the report itself is thought-provoking. The analysts speculate that as crypto gains greater institutional adoption, the link between macroeconomics and crypto assets may become more pronounced.