From Cryptoasset to Systemic Asset: Bitcoin, Monetary Policy and Liquidity Dynamics
DOI:
https://doi.org/10.32826/reyf.v3i8.396Keywords:
Bitcoin, Error correction vector, Cryptocurrency market volatility, Market liquidity, Monetary policy, Granger causalityAbstract
This paper investigates the dynamic relationship between Bitcoin, interest rates, equity markets, and monetary liquidity using a Vector Error Correction Model (VECM). Monthly data covering the period from June 2011 to June 2025 is employed, including Bitcoin prices, the S&P 500 index, short-term (3-month) and medium-term (1-year) U.S. Treasury yields. Results reveal a long-run cointegration relationship where Bitcoin is positively related to the S&P500 index and the 1-year yield, while negatively linked to short-term rates. Impulse-response functions confirm that Bitcoin reacts negatively to liquidity shocks in short-term funding markets but positively to monetary expansions, supporting the hypothesis of Bitcoin as a liquidity-sensitive asset. Variance decomposition further highlights the predominance of monetary variables over equity markets in explaining Bitcoin’s fluctuations. These findings align with the literature portraying Bitcoin as a hybrid asset, oscillating between speculative behaviour and partial hedge characteristics. The results underscore the importance of monetary policy and liquidity conditions in shaping Bitcoin’s role in global financial markets, offering insights for both investors and monetary policymakers.
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