The Crypto Cycle and US Monetary Policy
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Summary:
We examine fluctuations in crypto markets and their relationships to global equity markets and US monetary policy. We identify a single price componentโwhich we label the โcrypto factorโโthat explains 80% of variation in crypto prices, and show that its increasing correlation with equity markets coincided with the entry of institutional investors into crypto markets. We also document that, as for equities, US Fed tightening reduces the crypto factor through the risk-taking channelโin contrast to claims that crypto assets provide a hedge against market risk. Finally, we show that a stylized heterogeneous-agent model with time-varying aggregate risk aversion can explain our empirical findings, and highlights possible spillovers from crypto to equity markets if the participation of institutional investors ever became large.
