Is Bitcoin a safe haven asset? Uniswap, Circle, and academic institutions discuss the main factors driving cryptocurrency prices.

The leading decentralized exchange Uniswap released a report on the 11th, in collaboration with stablecoin issuer Circle and Copenhagen Business School, to explore the factors driving cryptocurrency price fluctuations. In addition to outlining the research methodology and hypotheses, the report also includes case studies on three significant events in the cryptocurrency market: COVID-19, FTX, and BTC ETF. This collaborative framework can serve as a model for industry-academic partnerships, and it is hoped that we will see more collaborative research efforts between industry and academia to explore these interesting topics.

Hedge Assets? Data Shows Traditional Finance Still Has a Significant Impact on Bitcoin Prices

The report uses the Vector Autoregression (VAR) model proposed by econometrician Christopher Sims to analyze Bitcoin returns by decomposing them into three types of structural shocks: traditional monetary policy shocks, traditional financial risk premium shocks, and crypto-specific demand shocks.

The model shows that traditional shocks can have a significant impact on the returns of new asset classes. For example, monetary policy contributed 50 percentage points to Bitcoin's rise in 2020, but resulted in a decrease of over -50 percentage points in Bitcoin's price in 2022. In other words, if the Fed had not tightened its monetary policy in 2022, Bitcoin returns would have been over 50 percentage points higher.

The model even suggests that in 2022, the impact of monetary policy on driving crypto returns is greater than crypto-specific demand shocks. Throughout the sample period, traditional risk premium shocks (risk-off) typically have a positive impact on crypto asset returns, indicating that traditional risk premiums are declining, except for a brief period during the March 2020 COVID-19 sell-off. Finally, while traditional shocks may have a significant impact on crypto prices at low frequencies, most of the daily fluctuations in Bitcoin prices cannot be explained by traditional shocks.

To explore how much of the volatility in crypto prices comes from spillover effects from traditional financial markets compared to the intrinsic risks of the assets themselves, researchers compared four assets - Bitcoin, stablecoin market capitalization, two-year zero-coupon government bonds, and the S&P 500 Index. These represent cryptocurrency, monetary policy, and traditional finance, respectively.

The report attributes much of the Bitcoin price growth from 2020 to mid-2021 to crypto demand. During this period, both stablecoin market capitalization and Bitcoin prices experienced significant growth. The report defines crypto adoption shocks as those that increase stablecoin market capitalization and Bitcoin prices. Conversely, as stablecoin growth has slowed since the end of 2022, with periods of reverse growth, Bitcoin prices show negative crypto adoption shocks (representing outflows from the crypto market).

Data During the Pandemic Shows the U.S. Dollar as the Market's Preferred Hedge Asset

Observing data from the early stages of the COVID-19 outbreak, in March 2020, Bitcoin prices saw a significant drop (25% in a single month), while stablecoin market capitalization increased significantly. The magnitude of the price decline exceeded what could be explained by fundamental factors, indicating heightened market risk aversion.

During this period of hedging, the substantial growth of stablecoins indicates that they are indeed considered hedge assets within the crypto space. In times of hedging, it is expected that traditional risk premium shocks and crypto risk premium shocks will play a dominant role. While bond yields declined in the medium term, the immediate changes in bond yields were highly unstable when the bond market faced liquidity issues. Therefore, monetary policy shocks may not be the sole reason, as yields temporarily rose in March 2020. The model attributes the decline in Bitcoin prices in 2020 to a combination of positive traditional risk premium shocks and positive crypto risk premium shocks.

Crypto Market Native Shocks: FTX Event Drives Price Changes

The report then mentions data before and after the FTX event, from September 2022 to January 2023, where Bitcoin prices significantly dropped. Most of the decline occurred during the FTX collapse in November 2022. At the same time, stablecoin market capitalization slightly decreased during this period, with a brief increase during the FTX collapse in November 2022, once again aligning with stablecoins' characteristic as hedge assets.

During the FTX collapse, there were intense fluctuations in the crypto market prices, while traditional financial market prices remained relatively stable. Therefore, during the FTX collapse, it is expected that crypto shocks, especially positive risk premium shocks and negative adoption shocks, would play a dominant role. In contrast, traditional shocks should have a smaller impact during the FTX collapse. The model indeed identifies negative crypto adoption shocks and positive crypto risk premium shocks during the FTX collapse.

During the November 2022 FTX collapse, the rising crypto risk premium caused Bitcoin prices to drop, while inflows into stablecoins were observed. Simultaneously, the negative crypto adoption shock further depressed Bitcoin prices and had a negative impact on stablecoin flows.

Bitcoin ETF Launch Reflects Market Interest in Institutional Participation

The report also compares the specific reasons that influenced cryptocurrency prices after the launch of a Bitcoin ETF. When BlackRock announced the submission of a Bitcoin spot ETF application, Bitcoin prices surged significantly. This period indicated a significant shift in investor sentiment and market dynamics within the crypto industry. The model identifies two main influencing factors: positive crypto adoption shocks and negative crypto risk premium shocks. The positive crypto adoption shock may reflect the increased legitimacy of market players like BlackRock entering the Bitcoin market and the growing interest from investors.

Crypto-Specific Factors Have the Most Significant Pricing Power for Bitcoin

Although traditional monetary policy and risk premium shocks have a certain impact on crypto prices, their effects are more pronounced at lower frequencies. Crypto-specific factors play a dominant role in explaining daily Bitcoin price changes. Additionally, the report found evidence in multiple cases supporting the hedging characteristics of stablecoins in the crypto asset space, as stablecoin market capitalization tends to increase during market periods.

The studies on market turmoil during COVID-19, the FTX collapse, and the launch of the BlackRock Bitcoin spot ETF further validate these points. These case studies highlight the importance of crypto-specific factors in driving crypto prices during significant market events.