The Eurosystem’s monetary policy has only a relatively minor impact on the prices of Bitcoin and other crypto tokens. This is the conclusion reached by Bundesbank experts in the September edition of the Monthly Report, which states that “monetary policy impulses explain only a fraction of the volatile price developments”. At first glance, the high rates of growth seen by crypto tokens appear to be attributable to other factors.

The Bundesbank’s economists initially analysed relatively narrow time windows around monetary policy decisions by the ECB Governing Council. They find that, although the prices of crypto tokens such as Bitcoin tend to fluctuate more strongly during these periods, these fluctuations are statistically insignificant and less pronounced than in the cases of shares, exchange rates and gold. Furthermore, the Bundesbank’s experts investigated the impact of monetary policy over time using an econometric model, which showed that an interest rate cut would lead to a significant rise in the price of Bitcoin. However, the Eurosystem’s monetary policy only explains a small component of the price fluctuations.

The volatility of crypto token prices is largely attributable to other factors, the Bundesbank’s economists write.

Other factors that play more important roles include financial market participants’ general appetite for risk, the acceptance of crypto tokens as a means of payment and a form of investment, and regulation. For example, according to the experts at the Bundesbank, token prices have often risen markedly in the past when large enterprises announced that they would accept Bitcoin as a means of payment for their products or that they intended to invest in Bitcoin themselves. There is also evidence to suggest that market prices often respond sensitively to announcements made by supervisory authorities indicating regulatory changes for tokens. In addition, the experts’ analyses lead to the conclusion that monetary policy has much greater significance for the responses of share prices and exchange rates, for example, than for the responses of crypto token prices.

Differences between crypto tokens and assets

In the current edition of the Monthly Report, the Bundesbank’s economists highlight the differences in the designs of crypto tokens and conventional assets. For instance, crypto tokens are units of value in distributed payment systems that are transferred using cryptographic procedures. The authors write that this is intended to prevent dependency on individual institutions at the heart of the system whose actions and continued existence would have to be relied upon. According to the Monthly Report, since amounts of value can be transferred digitally in a largely anonymous manner, tokens are also used for illegal purposes. New tokens are created on the basis of defined rules that do not allow for any flexible adjustment of the number of tokens in circulation, such as in response to changes in demand. “These particular features can also be observed empirically and contribute to the prices of crypto tokens fluctuating more strongly than share prices or exchange rates, for example, with which token prices have hardly any correlation”, the economists write. “Thus, tokens are primarily speculative assets; however, they are hardly suitable as a means of payment, a store of value or even a unit of account.”