Examining the Effect of Monetary Policy and Monetary Policy Uncertainty on Cryptocurrencies Market

TL;DR

This paper analyzes how monetary policy and its uncertainties impact Bitcoin returns, revealing that increased uncertainty negatively affects Bitcoin in both low and high volatility regimes using a Markov Switching Means VAR approach.

Contribution

It introduces a regime-dependent analysis of Bitcoin's response to monetary policy uncertainty, employing MSM-VAR to distinguish low and high volatility regimes.

Findings

Bitcoin returns decrease with rising MPU in both regimes

Two distinct volatility regimes identified in Bitcoin market

Bitcoin's sensitivity to FOMC decisions explored

Abstract

This study investigates the influence of monetary policy and monetary policy uncertainties on Bitcoin returns, utilizing monthly data of BTC, and MPU from July 2010 to August 2023, and employing the Markov Switching Means VAR (MSM-VAR) method. The findings reveal that Bitcoin returns can be categorized into two distinct regimes: 1) regime 1 with low volatility, and 2) regime 2 with high volatility. In both regimes, an increase in MPU leads to a decline in Bitcoin returns: -0.028 in regime 1 and -0.44 in regime 2. This indicates that monetary policy uncertainty exerts a negative influence on Bitcoin returns during both downturns and upswings. Furthermore, the study explores Bitcoin's sensitivity to Federal Open Market Committee (FOMC) decisions.