The Federal Reserve Bank releases a new paper on Bitcoin
The US Federal Reserve has published a new paper taking a hard look at Bitcoin and its lack of response to most macroeconomic news.
The article written by Gianluca Benigno and Carlo Rosa examines the relationship between Bitcoin and macroeconomic reasons by estimating the impact of macroeconomic news on Bitcoin using an event study with intraday data. The key takeaway is that, unlike other US asset classes, Bitcoin is orthogonal to monetary and macroeconomic news.
The Federal Reserve Bank of New York compared Bitcoin to other asset classes such as precious metals and the S&P 500, and ultimately concluded that Bitcoin cannot be used as a form of payment on a large scale, mainly due to its high volatility.
Federal Reserve Bank officials view Bitcoin and other crypto assets more in line with gold and other precious metals rather than the US dollar. The speculative probability model used by the bank to determine future probabilities related to Bitcoin value showed that monetary news about the future policy has more visible effects on the Bitcoin price than those about the current target rate.
Bitcoin’s reaction to macroeconomic news
The report also revealed that the Bitcoin price reacts with increased volatility before and after the FOMC statements on the country’s interest rates. The Fed compared the reaction of Bitcoin’s price in 30-minute and 1-hour time frames to fiat currencies such as JPY, EUR, USD and GBP during macroeconomic news events that were seen as high impact.
Although the Fed concluded that Bitcoin is unresponsive to both monetary and macroeconomic news, it noted that more studies are needed to fully understand the link between Bitcoin and the macroeconomic aspects.
According to The Paypers’ Crypto Payments and Web 3.0 For Banks, Merchants, and PSP report released in November 2022, in the United States cryptocurrencies are not considered legal tender by the Financial Crimes Enforcement Network (FinCEN) and the Internal Revenue Service (IRS).
Still, the IRS defines cryptocurrency as “a digital representation of value that serves as a medium of exchange, a unit of account, and/or a store of value,” and has issued tax guidance accordingly. In March 2014, it said that Bitcoin and other cryptos will be taxed as “property” and not currency.
Is Washington turning its back on crypto?
According to axios.com, the current state of the cryptocurrency market combined with the collapse of FTX has contributed to a general mistrust of cryptocurrencies in Washington. To illustrate, the source reveals that Custodia Bank, a crypto-friendly bank, firmly refused its request to join the Federal Reserve system, even though it believed it was doing everything by the book.
Furthermore, the Fed also warned all other banks that they must ask for permission before engaging in crypto activity, and the White House published an administrative roadmap to reduce the risk of cryptocurrencies, underscoring the administration’s focus on protecting investors and keeping out bad ones. actors responsible while ensuring that cryptocurrencies cannot undermine financial stability.
