The macroeconomics of crypto demand

In a new report by S&P Global, the authors do a useful service by reminding readers in multiple ways of an incontrovertible fact: Crypto is still new.

Why it matters: When viewed as something to invest in, it's especially new compared to other asset classes because it's really only existed under zero interest-rate policy (ZIRP), when money is cheap.

Driving the news: A new report by the financial information and analytics firm looks at crypto assets over their history, up through March 2023, comparing the performance of an index of leading assets with various economic trends and indicators.

• It reminds us that the world is still figuring out if it wants digital assets and what it wants them to do.

What they're saying: "Crypto assets are not exempt from the effect of macroeconomic changes, even if performance is also powered by other drivers such as technology and market sentiment," the authors write.

• It's crucial to remember that Bitcoin has existed entirely in a weird historical moment. As the authors put it, "The recent period of historically low interest rates fueled investors’ appetite for higher-yielding assets."

The big question: Satoshi created Bitcoin because he objected to governments debasing people's wealth by printing more money willy-nilly. That was a core idea. In other words, it was meant to hedge against inflation. So, has it?

• "Overall, the data to date does not support a conclusive answer," S&P Global writes.
• Inflationary effects can be more severe in the developing world, and so the report notes stronger effects might be seen in such places.
• That said, gold, over the study period, seemed to work better as a hedge.

Overall, the report paints a compelling picture that market sentiment for cryptocurrencies is heavily informed by macroeconomic forces.

• For example, "The 2021 bull run in the crypto market coincided with a period of ultra-loose monetary conditions," they write.

Yes, but: While the report finds strong correlations between certain macroeconomic forces, those who know the history of crypto can read between the lines and see other factors at play.

• For example, the authors found a very strong correlation (0.75) between the expansion of the M2 money supply and crypto prices.
• That said, the correlation broke down badly in 2018.

Flashback: That's when the crypto boom came to an abrupt halt, when word went around that the SEC was sending tough questions to ICO-funded projects. In other words, real-world crypto-specific news was more important than macro forces — at times.

The bottom line: "Some argue that crypto assets could be in demand in a high interest rate/high inflation environment because they could serve as a store of value. We think the track record for crypto is too short to prove this," S&P Global staff writes.