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Cryptocurrency linked signals

26 July 2021

Research Signals - July 2021

Bitcoin, the first and most popular cryptocurrency, was created in 2009 to function as money in the form of a peer-to-peer digital payment system. While it is a long way from widespread acceptance as an alternative to other fiat currencies, Bitcoin has experienced an uptick in recognition from high profile corporations and investment firms in addition to its recent acceptance in El Salvador as an alternative legal tender to the US dollar. With the increased interest in cryptocurrencies from financial institutions and investors, we study interactions between the price of Bitcoin and macroeconomic indicators and factor signals.

  • Since January 2014, Bitcoin has traded relatively independent of the US dollar, US 10 year treasury yields and CPI, contradicting expectations for its use as a competitor to other stores of value and hedge against inflation
  • The level of risk appetite in equity markets has been more influential on Bitcoin pricing, particularly given the rise in retail investors since 2020, as confirmed by a positive correlation with high beta stocks
  • Changes in market dynamics since 2020, particularly with respect to the rapid rise in equity retail traders and meme stocks, has increased the relationship between the performance of Bitcoin and signals of high trading volume and heavily shorted stocks

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