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The Crypto Multiplier

Author

Listed:
  • Rodney Garratt
  • Maarten van Oordt

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.

Suggested Citation

  • Rodney Garratt & Maarten van Oordt, 2023. "The Crypto Multiplier," BIS Working Papers 1104, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1104
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    More about this item

    Keywords

    Bitcoin; cryptocurrency; exchange rates; monetary economics; risk management;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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