The Crypto Multiplier

Rodney Garratt and Maarten van Oordt

No 1104, BIS Working Papers from Bank for International Settlements

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.

Keywords: Bitcoin; cryptocurrency; exchange rates; monetary economics; risk management (search for similar items in EconPapers)
JEL-codes: E42 E51 (search for similar items in EconPapers)
Date: 2023-06
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-mfd, nep-mon, nep-pay and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:1104

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