Our mission at Circle is to raise global economic prosperity through the frictionless exchange of value. As part of that mission, we’re constantly looking to understand market dynamics, what drives them, and why digital asset prices move the way they do.
The broader crypto market has grown to a market cap of over $2.37T. Despite its growth, crypto markets are generally seen as difficult to understand, unpredictable and illogical.
New research from Circle Chief Economist Gordon Liao and researchers from Uniswap Labs and the Copenhagen Business School provides insight into how traditional financial factors — like U.S. monetary policy — impact crypto price movements, underscoring that digital assets behave similarly to traditional asset classes in the global financial markets.
The paper decomposes asset prices into monetary policy, broad market risk premium, and crypto-specific demand since early 2019. Finding, for example, that contractionary monetary policy accounted for more than two-thirds of Bitcoin’s sharp decline in 2022. It also examines event studies like the FTX bankruptcy, the Bitcoin ETF announcements, and COVID-19 financial turmoil.
Bitcoin return by shock since 2019
Stablecoins and Crypto Adoption
The study extends its model to include stablecoins, which are considered safe assets within the digital currency ecosystem. By incorporating changes in stablecoin market capitalization, this model differentiates between shocks driven by changes in crypto adoption and those driven by crypto-risk premiums.
The research concludes that crypto prices may be more logical than they’ve historically been perceived to be. Read the full paper.
