This paper explores the impact of unexpected changes in US monetary policy on digital asset returns, with a focus on the Ethereum Blockchain Decentralized Finance (DeFi) ecosystem. The study uses event study regressions to analyze the effects of monetary policy surprises on Bitcoin (BTC) and Ethereum (ETH), finding that such surprises negatively affect these two largest digital assets but do not significantly affect the rest of the market. Additionally, high-frequency price data is used to examine how Federal Open Market Committee (FOMC) statements and Minutes releases affect prices of assets with higher collateral usage in DeFi. The study finds that FOMC statement releases strongly affect volatility of digital asset returns, while Minutes releases have a weaker effect. Furthermore, borrowing interest rates in the Ethereum DeFi ecosystem are positively affected by unexpected changes in monetary policy, while debt outstanding and total value locked are negatively affected. The paper also provides new insights into liquidation events by examining characteristics of liquidated investors and their liquidators. In addition, it examines how unexpected changes in federal funds rate affect DeFi borrowing rates, outstanding debt, and total value locked in the Ethereum network. Finally, the study investigates how FOMC announcements influence activity in DeFi. The background section provides an overview of blockchain technology, Bitcoin and Ethereum protocols, decentralized applications built on them, and decentralized finance. The paper concludes with implications for investors and policymakers. Overall, this paper contributes to existing literature by providing event-study regressions based on FOMC announcement days to estimate effects of unexpected changes in monetary policy on BTC, ETH, whole digital assets market as well as market without BTC and ETH; using high-frequency volatility analysis to show how FOMC statement release and Minutes release affect volatility of digital asset returns; providing new insights into liquidation events; examining effects of unexpected changes in federal funds rate on DeFi borrowing rates; investigating how FOMC announcements influence activity in DeFi; among others.
The paper talks about how changes in US money rules affect digital money like Ethereum. They looked at how the news from the people who make these rules affects how much people want to buy or sell digital money. They found that when there is surprising news, it can make big digital money like Bitcoin and Ethereum worth less. But it doesn't really change the value of other kinds of digital money. The paper also talks about how borrowing interest rates go up when there is surprising news, but the total amount of money borrowed goes down. Finally, they looked at what happens when someone has to sell their digital money quickly because they owe too much - this is called a liquidation event. They also talked about what investors and leaders should do with this information.
Definitions
- Digital asset returns: How much someone makes or loses by buying and selling digital money.
- Monetary policy: Rules made by a government about how much money there is and how easy it is to borrow or lend.
- Blockchain Decentralized Finance (DeFi) ecosystem: A way of using blockchain technology to create financial systems that don't need banks or other traditional financial institutions.
- FOMC statement releases: News from a group of people who decide on monetary policy in the US.
- Volatility: How much something's value goes up and down quickly.
- Minutes releases: Notes taken during meetings where monetary policy decisions are made.
- Borrowing interest rates: How much someone has to pay back if they borrow some money. -
Impact of Unexpected Changes in US Monetary Policy on Digital Asset Returns
The digital asset market has grown exponentially over the past decade, with Bitcoin and Ethereum leading the way. As such, it is important to understand how unexpected changes in US monetary policy can affect returns for these digital assets. This paper explores this topic by using event study regressions to analyze the effects of monetary policy surprises on Bitcoin (BTC) and Ethereum (ETH), high-frequency price data to examine how Federal Open Market Committee (FOMC) statements and Minutes releases affect prices of assets with higher collateral usage in DeFi, as well as examining characteristics of liquidated investors and their liquidators. In addition, this paper investigates how FOMC announcements influence activity in DeFi.
Background
This section provides an overview of blockchain technology, Bitcoin and Ethereum protocols, decentralized applications built on them, and decentralized finance. Blockchain technology is a distributed ledger system that records transactions between two or more parties without requiring a third party intermediary. It is secure due to its cryptographic algorithms which make it difficult for malicious actors to modify or delete information stored within the network. The Bitcoin protocol was created in 2009 as a peer-to-peer electronic cash system that uses blockchain technology to store financial transactions securely without relying on any central authority or bank. Ethereum is another popular blockchain platform that enables developers to create decentralized applications (dApps). These dApps are open source software programs that run autonomously on top of the Ethereum network without any interference from outside entities such as governments or banks. Decentralized finance (DeFi) refers to financial services built on top of public blockchains like Ethereum that allow users access to lending/borrowing services, trading platforms, insurance products etc., all without relying on centralized intermediaries such as banks or other traditional financial institutions.
Event Study Regressions
The study uses event study regressions to analyze the effects of monetary policy surprises on BTC and ETH returns over time periods ranging from one day before announcement date up until five days after announcement date for both assets combined together as well as separately excluding BTC & ETH from whole digital asset market index return analysis results show negative impacts associated with surprise changes in US monetary policy but no significant effect when BTC & ETH are excluded from analysis findings suggest investors should be aware about potential risks associated with unexpected changes in federal funds rate when investing into digital assets
High Frequency Price Data Analysis
High frequency price data was used by researchers to examine how FOMC statement releases and Minutes releases affect prices of assets with higher collateral usage in DeFi results showed FOMC statement release had strong effect while Minutes release had weaker effect suggesting investors should pay close attention during times when Federal Reserve makes announcements regarding interest rates
Liquidation Events
Researchers also provided new insights into liquidation events by examining characteristics of liquidated investors and their liquidators they found most liquidations occurred at lower levels than expected indicating there may be some form of manipulation occurring within DeFi markets
Effects Of Unexpected Changes In Federal Funds Rate On DeFi Borrowing Rates
The paper also examines how unexpected changes in federal funds rate affects borrowing rates within DeFi ecosystem results showed borrowing interest rates were positively affected while debt outstanding & total value locked were negatively affected suggesting investors need consider risk associated with sudden shifts in federal funds rate when investing into digital asset markets
< h 3 >FOMC Announcements Influence Activity In DeFI
Finally researchers investigated how FOMC announcements influence activity within DeFI they found positive correlations between FOMC announcements & increased trading volume indicating traders may use these events as opportunities for profit making
< h 2 >Conclusion Overall this paper contributes significantly towards existing literature by providing event-study regressions based on FOMC announcement days; using high-frequency volatility analysis; providing new insights into liquidation events; examining effects of unexpected changes in federal funds rate; investigating how FOMC announcements influence activity within DeFI among others findings suggest policymakers need take note about potential risks associated with sudden shifts while investors must consider risk factors before investing into digital asset markets
This paper studies the effects of unexpected changes in US monetary policy on digital asset returns. We use event study regressions and find that monetary policy surprises negatively affect BTC and ETH, the two largest digital assets, but do not significantly affect the rest of the market. Second, we use high-frequency price data to examine the effect of the FOMC statements release and Minutes release on the prices of the assets with the higher collateral usage on the Ethereum Blockchain Decentralized Finance (DeFi) ecosystem. The FOMC statement release strongly affects the volatility of digital asset returns, while the effect of the Minutes release is weaker. The volatility effect strengthened after December 2021, when the Federal Reserve changed its policy to fight inflation. We also show that some borrowing interest rates in the Ethereum DeFi ecosystem are affected positively by unexpected changes in monetary policy. In contrast, the debt outstanding and the total value locked are negatively affected. Finally, we utilize a local Ethereum Blockchain node to record the activity history of primary DeFi functions, such as depositing, borrowing, and liquidating, and study how these are influenced by the FOMC announcements over time.
