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S&P Global is assessing the vulnerability of digital assets to macroeconomic factors

The rating agency investigated five points of contact between the cryptocurrency ecosystem and conventional banking, and its inability to draw any solid conclusions about the topic may be instructive

Shashank Bhardwaj
Published: May 11, 2023 05:41:19 PM IST

S&P Global is assessing the vulnerability of digital assets to macroeconomic factorsImage: Shutterstock

S&P Global, a leading ratings agency, has released a paper investigating the potential link between crypto assets and traditional economies. Its conclusion is a definite “maybe”. The specifics are difficult to pin down because of "idiosyncratic phenomena" like the crypto winter, geography, and the industry's little existence.

Even while crypto assets and traditional assets have separate value propositions and performance drivers, the S&P report's introductory remarks make clear that the crypto ecosystem and macroeconomics are inextricably linked. S&P analysts collated the S&P Cryptocurrency Broad Digital Market Index (BDMI) with other financial indicators to discover the full extent of this dependency across these five dimensions.

It is stated in the research that "crypto assets are not insulated from the effect of macroeconomic shifts" but that the function of idiosyncrasy in crypto economics is substantial. To cite one instance: The report cannot prove a causal relationship, but the cryptocurrency markets have done well during times of expansionary monetary policies. Some major fluctuations in crypto assets have occurred after factors not directly tied to monetary policy, such as the FTX collapse.

Although the variables differ, the connection between crypto and recessionary expectations is also very distinct. User location and the strength of the local fiat currency come into play here. The value of crypto assets rises and falls with the value of fiat currency. Despite this, the report highlighted the introduction of "asset management products that integrate crypto assets," which is connected to the belief that crypto can resist economic shock.

The crypto market's potential as a hedge against inflation could be clearer. The authors noted that this is a difficult issue, and the available data may need to be revised to provide a definitive answer. Cryptocurrency's apparent resistance to inflation may be a factor in its rising popularity in emerging nations with unstable fiat currencies, they argued, highlighting the role of geography and individualism. The authors remarked that crypto market cycles could have origins apart from general economic conditions.

Analysts expressed more conviction in their writing when discussing the dollar's strength in relation to cryptocurrency. There appears to be a negative connection between them, but further investigation did not provide evidence for a causal relationship. The report stressed that "correlation does not substitute for causality."

CBOE Volatility Index, also called the fear index," indicated how crypto performed in times of financial stress and market volatility, as stated in the research. As worries about the traditional economy grow, the value of cryptocurrencies tends to fall. Analysts pointed out that crypto-friendly institutions are naturally susceptible to crypto's quirks and that the March banking crisis forced certain stablecoins to depeg.

The report's lack of definitive conclusions is instructive in and of itself, given that many crypto advocates point to macroeconomic characteristics like crypto's resistance to inflation as its key virtues. The experts theorized that stronger institutional crypto adoption might strengthen the link between macroeconomics and crypto assets.

The writer is the founder at yMedia. He ventured into crypto in 2013 and is an ETH maximalist. Twitter: @bhardwajshash