• BCMstrategy, Inc.

Policy Risk and Market Prices -- The Bitcoin Example

Now that the PolicyScope Platform has at least 18 months of data, we can begin to perform analysis on how policy momentum and market prices relate to each other.

Our "How To Trade The News" blog series in 2019 for Interactive Brokers (and the companion White Paper) explained the principles of how thoughtful investors can out-perform headline-reading bots by using the data generated by our patented process. Today, we take the next logical step and start showing how market prices correlate (positively, inversely) with different policy moves.

Let's start with BitCoin and its relationship with two closely related policy initiatives: cryptocurrency and central bank digital currency (CBDC).

Basic Background

Cryptocurrency and CBDC policy initiatives are two sides of the same coin (pardon the pun). As discussed in our analysis for the Atlantic Council this week, central banks are accelerating their efforts to launch sovereign digital currencies in part due to competition from private issuers. Advanced economies are also competing with sovereign digital currency issuers, particularly China.

Policymakers can launch their own digital currencies, but this will take time. Sovereigns are not likely to rush pioneering projects, particularly when the projects could hold undetermined consequences for the conduct of monetary policy and for the reserve currency status of their individual currencies.

Policymakers can buy time for their projects by creating, in parallel, additional regulatory hurdles for competing cryptocurrency and stablecoin issuers. Regulatory initiatives regarding cryptocurrency and stablecoin issuers certainly target legitimate and separate macroprudential and financial stability priorities. But a fringe benefit from an expanding regulatory perimeter is that it levels the playing field with central banks experimenting with their own digital asset strategies.

The question is whether price movements regarding the most established cryptocurrency available today (BitCoin) illustrates any reaction function in relation to policy initiatives in the cryptocurrency or CBDC arenas. For our initial analysis, we chose the BitCoin/USD price data

BitCoin/Cryptocurrency: A Correlation Story

When we layer the BitCoin monthly price data together with PolicyScope Platform data, a high degree of correlation can be seen visually during 2019.

The outcome is intuitive. Policymakers and BitCoin both reacted strongly to the Libra proposal. A strong reaction in BitCoin prices also occurred coincident with the Group of Twenty and Financial Stability Board autumn meetings, at which global policymakers made clear they were aligning their policy processes to co-exist with cryptocurrency issuers.

The 2020 dynamics so far have been different. The peak in policy action at the height of the COVID-19 emergency actions were followed by a sharp price increase.

Why? Because policymakers in most advanced economies pivoted fast and hard towards finding electronic delivery mechanisms for distribution of emergency funding to individuals. Even when electronic mechanisms were not ultimately used (as in the United States), the writing on the wall was clear: safe, secure, electronic payments mechanisms are quickly becoming a necessity. In addition, the massive increase in sovereign debt loads leads many to conclude that existing fiat currencies may soon experience a serious reckoning.

BitCoin/CBDC: A Covariance Story

The relationship between BitCoin prices and CBDC policy is a bit different. Rhetoric levels in the PolicyScope platform are muted regarding CBDC issues because our input channels currently do not take in data from specialized third party publishers that cover the cryptocurrency sector. Our media inputs are more traditional....and those media sources do not typically report on CBDC initiatives.

However, we know the cryptocurrency market follows closely every move central banks make regarding CBDCs. The relationship between BitCoin prices and CBDC initiatives so far is proving to be an inverse relationship for the same time period (January 2019 to July 2020):

This again is intuitive. Action regarding CBDCs will not have a direct and immediate impact on the fundamentals driving value in cryptocurrency markets.

Correlation, Causation, and More Research

We are just at the front end of our research regarding how our data correlates with asset markets.

We will be diving in to causation chains and reaction functions as PolicyScope Platform data becomes more robust. We will be exploring how different asset classes perform relative to other policy issues. And we will be preparing graphs that adjust for scale.

Our research list is long. So stay tuned!


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