Template-Type: ReDIF-Paper 1.0
Author-Name: Rodney Garratt
Author-X-Name-First: Rodney
Author-X-Name-Last: Garratt
Author-Name: Maarten van Oordt
Author-X-Name-First: Maarten
Author-X-Name-Last: van Oordt
Title: The Crypto Multiplier
Abstract: The exchange rates of cryptocurrencies are highly volatile. This paper provides insight into the source of this volatility by developing the concept of a "crypto multiplier," which measures the equilibrium response of a cryptocurrency's market capitalization to aggregate inflows and outflows of investors' funds. The crypto multiplier takes high values when a large share of a cryptocurrency's coins is held as an investment rather than being used as a means of payment. Empirical evidence shows that the number of coins held for the purpose of making payments is rather small for major cryptocurrencies suggesting large crypto multipliers. The analysis explains why announcements by large investors, celebrity endorsements or financial crises can result in substantial price movements.
Creation-Date: 2023-06
File-URL: https://www.bis.org/publ/work1104.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1104.htm
File-Format: text/html
Number: 1104
Keywords: Bitcoin, cryptocurrency, exchange rates, monetary economics, risk management
Classification-JEL: E42, E51
Handle: RePEc:bis:biswps:1104