The asymmetric relationship between monetary policy and the institutional investors march into cryptocurrencies

Abstract

Using monthly data from April 2017 to June 2023, this study explores the factors associated with the rising institutional investments in cryptocurrencies, focusing on US monetary policy. We employ nonlinear autoregressive distributed lag (NARDL) and multiple threshold nonlinear ARDL (MT-NARDL) models to investigate the relationship between institutional crypto assets under management (AuM), the US Shadow Federal Funds Rate, Bitcoin price, S&P 500 index, and VIX. The results reveal a long-run asymmetrical relationship: institutional Crypto AuM increase with decreasing rates but remain stable during periods of monetary tightening. Moreover, institutional exposure to cryptocurrencies shows long-term growth, though short-term market volatility reduces exposure. Interestingly, Bitcoin's price seems to play a minimal role in these decisions. Our findings highlight the need for robust risk management by portfolio managers and suggest that policymakers consider the institutional capital flows into cryptocurrencies, given the potential implications for financial stability.