Crypto-asset Price Drivers

How do crypto-asset prices interact with conventional market risks, monetary policy and crypto-specific factors? In their July 2024 paper entitled “What Drives Crypto Asset Prices?”, Austin Adams, Markus Ibert and Gordon Liao investigate factors influencing crypto-asset returns using a sign-restricted, structural vector auto-regressive model. Specifically, they decompose daily Bitcoin returns into components reflecting:

• Monetary policy – estimated from effects of changes in the short-term risk-free rate on crypto-asset prices.
• Conventional risk premiums – estimated from daily interactions of 2-year zero coupon U.S. Treasury notes (T-notes) and the S&P 500 Index to account for changes in risk compensation required for holding traditional financial assets.
• Crypto risk premium – estimated from variations in the risk compensation demanded
  by investors for holding crypto assets as indicated by crypto-asset market liquidity and volatility.
• Level of crypto adoption – estimated from co-movements of Bitcoin and stablecoin market capitalizations to reflect crypto-asset innovation, regulatory changes and sentiment shifts.

Using daily data for the risk-free rate, S&P 500 Index, T-notes, Bitcoin and two stablecoins (USDT and USDC), during January 2019 through February 2024, they find that: (more…)