Insight
August 19, 2022
Greg Cipolaro & Ethan Kochav

Research Weekly - What Fiscal and Monetary Policy Say About Bitcoin

IN TODAY'S ISSUE:

  • As the White House signs two new stimulus bills into law, monetary and fiscal policy continue to play a role in driving crypto markets.
  • One derivative of these policies, the growth in monetary bases, shows a growing but limited impact on bitcoin.
  • With inflation still a hot topic, perhaps the slowing growth in inflation encourages less hawkish monetary policy.

More Fiscal Stimulus (and Taxes) Signed into Law

This week, the White House signed into law the Inflation Reduction Act (IRA). The bill, which is designed to reduce the deficit by offsetting $437B of new spending largely on energy and climate change initiatives with new tax collections and prescription drug pricing reforms, is ostensibly aimed at reducing the macroeconomic issue plaguing the US economy: inflation. This comes on the heels of another economic reform, the CHIPS and Science Act, which provides over $50B to American semiconductor companies to expand manufacturing and research and development efforts domestically.

Since the onset of the COVID-19 health care crisis nearly two and half years ago, monetary and fiscal policies have been seen as a driving force behind asset price movements. Risk asset prices collapsed in March 2020 in response to the sudden screeching halt in the economy, but then rebounded swiftly in the wake of swift monetary action by the Federal Reserve and fiscal stimulus approved by legislators. The Fed essentially rolled out its entire Global Financial Crisis response playbook in a matter of weeks, and the fiscal stimulus was the biggest its been since the Great Depression (as a percentage of GDP). Of late, fiscal and monetary policy have been major drivers of bitcoin prices, as can be seen in the chart below of major fiscal and monetary policies in the US throughout bitcoin’s price history. The outburst of initial stimulus saw rising bitcoin prices, and its withdrawal saw prices retrace.

Monetary Bases Show Growing, but Limited, Impact on Bitcoin

The evidence of a growing relationship between bitcoin and policy, especially monetary policy, can be seen in bitcoin’s relationship to the U.S. and global monetary base (also known as M2). Monetary policy is designed to increase or decrease the monetary base, so dovish policy should result in M2 growth and vice versa. Historically, there has not been statistical evidence of a relationship between bitcoin and M2 growth. However, recently, there have been signs of growing (albeit still limited) relationship between the two.

Inflation Continues to be Top of Mind

As was exhibited by the White House signing the Inflation Reduction Act into law, inflation has been the economic story over the past year and a half. While certain commodities and input prices were exacerbated by the conflict between Russia and Ukraine that started in February of this year, the origin and outgrowth of inflation seemed to originate with the COVID-19 health care crisis and the fiscal and monetary stimulus marshalled in its response. In the first bit of good news on the inflation front, however, the July Consumer Price Index (CPI) released on August 10, showed the first signs of deceleration (using 2-year stacked growth) since inflation started to rise at the end of 2020. Risk markets cheered the news with both stocks and bitcoin rising on the release. The market’s expectation is that as inflation is tamed, hawkish monetary policy can lessen as well.

Market Update

Bitcoin saw losses on the week, dropping 3.7%. Equities saw gains, as the S&P 500 rose 1.9% and the Nasdaq increased 1.5%. Bonds were mixed on the week: Investment Grade Corporate Bonds were flat, High Yield Corporate Bonds decreased by 0.6%, and Long-Term Treasuries increased by 0.4%. Gold fell by 1.6% on the week as real yields were mixed and inflation expectations decreased.

Important News This Week

Regulation and Taxation

Federal Reserve Releases Guidance for Banks Pursuing Crypto — Fed

SEC Files Unregistered Security Complaint Against Token Issuer — SEC

IRS Serves Summons on Crypto Exchange Seeking Tax Avoiders — DoJ

Companies

Galaxy Announces Termination of BitGo Acquisition — Galaxy

BitGo Plans to Seek Damages from Galaxy — BitGo          

Celsius Releases Coin Report — Celsius

Zipmex Granted 3-Month Moratorium — The Block

Dragonfly Purchases Hedge Fund — The Block

How Mashinky Took Control over Celsius Trading Strategy — Financial Times

Genesis CEO Leaves Firm — Genesis

Former Coinbase VP Adam White Joins Blackstone — CoinDesk

Investing

ETHW Core Releases Initial Version — ETHW Team

Crypto Nomads Move Back to Big Cities — Bloomberg

Tether Changes its Accounting Firm to BDO Italia — Tether

Upcoming Events

August 26th – CME bitcoin futures and options expiry

September 2nd – United States Non-Farm Payrolls

September 13th – July CPI data is released

September 21st – Next FOMC interest rate decision

Thanks for joining us again this week. Please reach out with any questions or comments.

Sincerely,
The NYDIG Team

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