New York Fed says Bitcoin shares most features of ‘a store of value’

The Federal Reserve Bank of New York said in a Feb. 9 report that Bitcoin performs more kin to a precious metal like gold but warns that it can never replace the US dollar due to volatility. 

Using a quantitative methodology known as principal components analysis, the researchers examined the price of Bitcoin around intraday changes in money market forward rates in thirty-minute and one-hour intervals before and after scheduled FOMC announcements. 

The 31-page report authored by Gianluca Benigno and Carlo Rosa, agrees with a statement made by Fed Chair Jerome Powell, who insisted back in 2021 that: “Crypto assets are highly volatile […] They’re more of an asset for speculation, so they’re not particularly in use as a means of payment. It’s more of a speculative asset. It’s essentially a substitute for gold rather than for the dollar.”

The new report builds on Powell’s analysis to posit that Bitcoin performs agnostic to macroeconomic news: 

“The main result is that Bitcoin is orthogonal to all macro news that we consider except CPI. This is in stark contrast with the other assets that we use for comparison (gold, silver, S&P 500, and various bilateral exchange rates). All other traditional assets respond to macroeconomic news with an economically large and significant coefficient.”

It reiterated a longstanding belief held within some regulatory circles that Bitcoin is a “speculative asset,” adding that price action tends to follow monetary news regarding the future of monetary policy, such as FOMC statements on interest rates and inflation, in other cases — which seemed to puzzle the researchers. 

For example, an unanticipated surge in US inflation could result in higher production costs for exports, making a country’s products less appealing in the global market. This, researchers say, may cause the nation’s currency to decline in value, which theoretically should correlate to a spike in Bitcoin’s value.

Only the evidence was inconclusive.  

However, if the Federal Reserve takes action to counteract inflation by raising short-term interest rates, this could lead to an appreciation of the US dollar, potentially leading to a temporary increase in the price of the cryptocurrency. 

The Fed analyzed the reaction of Bitcoin’s price over 30-minute and 1-hour intervals in comparison to leading fiat currencies such as the Japanese Yen (JPY), Euro (EUR), US Dollar (USD), and British Pound (GBP) during significant macroeconomic news events.

Interestingly, the Fed found that Bitcoin is not influenced by monetary or macroeconomic news. However, the Fed acknowledged the need for further research to understand the disconnect between Bitcoin and macroeconomic factors is still needed to make sense of these initial results. 

Ultimately, “we find that Bitcoin is unresponsive to both monetary and macroeconomic news. In particular, the result that Bitcoin does not react to monetary news is puzzling as it casts some doubts on the role of discount rates in pricing Bitcoin.”