CHAPTER II

THEORETICAL FOUNDATION AND LITERATURE REVIEW

A. Theoretical Framework
1. Understanding Bitcoin and Digital Currencies
a. Overview of Bitcoin and its Significance in the Financial Markets
Bitcoin, presented in 2008 by an mysterious individual or bunch
known as Satoshi Nakamoto, speaks to a progressive concept within the
domain of digital back. As the primary decentralized cryptocurrency,
Bitcoin works on a peer-to-peer organize without the require for a central
specialist, such as a bank or government. Its fundamental innovation,
blockchain, guarantees straightforwardness and security through a
conveyed record that records all exchanges over a organize of computers.
This advancement has situated Bitcoin not as it were as a medium of trade
but moreover as a critical budgetary resource (Nakamoto, 2008). Bitcoin's
showcase importance is multifaceted. It offers an elective to conventional
monetary standards, giving a support against swelling and budgetary
flimsiness. Financial specialists see Bitcoin as "digital gold" due to its
restricted supply of 21 million coins, which contrasts sharply with the
inflationary nature of fiat currencies (Baur & Dimpfl, 2021). Bitcoin's
ability to be transferred globally with minimal fees and without
intermediaries has made it an attractive option for remittances and cross-
border transactions, In the financial markets, Bitcoin's influence extends
beyond its use as a currency. Its high volatility has made it a favorite
among speculative traders, contributing to significant price swings and
trading volumes. Institutional investors, including hedge funds and
publicly traded companies, have also started to include Bitcoin in their
portfolios as a diversification strategy. For instance, in 2021, Tesla Inc.
invested $1.5 billion in Bitcoin, signaling growing institutional
acceptance and trust in the cryptocurrency (Kovach, 2021).

8
 9

b. Historical Background and Evolution of Bitcoin

Bitcoin's travel started with the distribution of the whitepaper titled
"Bitcoin: A Peer-to-Peer Electronic Cash Framework" by Nakamoto in
2008. The primary square, known as the beginning square, was mined on
January 3, 2009. Within the early a long time, Bitcoin was fundamentally
utilized by tech devotees and cryptography specialists. Its esteem was
irrelevant, and it was frequently traded casually between clients, The
primary critical exchange including Bitcoin happened in 2010 when a
software engineer named Laszlo Hanyecz paid 10,000 BTC for two
pizzas, an occasion presently celebrated yearly as Bitcoin Pizza Day. This
exchange checked Bitcoin's rise as a real-world cash, though with
considerable instability and vulnerability with respect to its future
(Narayanan et al., 2016), Bitcoin gained mainstream attention during the
early 2010s, particularly during the 2013 price surge when it crossed
$1,000 for the first time. This period also saw the rise of numerous Bitcoin
exchanges and the infamous Mt. Gox incident, where the exchange was
hacked, resulting in the loss of approximately 850,000 BTC. Despite this
setback, Bitcoin continued to grow, driven by increasing media coverage
and public interest (Cheah & Fry, 2015), The next major milestone came
in 2017 when Bitcoin's price soared to nearly $20,000. This surge was
fueled by speculative trading and the initial coin offering (ICO) boom,
where new cryptocurrencies were launched and funded through Bitcoin
and Ethereum. However, this period also highlighted the regulatory
challenges facing Bitcoin, as governments worldwide grappled with how
to manage and integrate this new financial instrument into existing legal
frameworks (Conlon et al., 2021), Bitcoin's evolution has also been
marked by technological advancements. The implementation of the
Segregated Witness (SegWit) protocol in 2017 and the development of
the Lightning Network aimed to address scalability issues, allowing for
faster and cheaper transactions. These innovations are crucial for Bitcoin's
 10

ongoing adoption and usability as a currency and a financial asset (Baur

& Dimpfl, 2021).

c. Comparison with Other Cryptocurrencies

While Bitcoin was the first cryptocurrency, it has since been joined
by thousands of others, collectively known as altcoins. Ethereum,
launched in 2015, is perhaps the most notable of these. Unlike Bitcoin,
which is primarily a digital currency, Ethereum functions as a
decentralized platform for smart contracts and decentralized applications
(dApps). Its native currency, Ether (ETH), is used to power these
applications and pay for transaction fees (Narayanan et al., 2016), Ripple
(XRP) is another significant cryptocurrency, designed for fast and low-
cost international payments. Unlike Bitcoin, Ripple does not rely on a
blockchain but uses a consensus ledger and a unique distributed
consensus mechanism. This has allowed Ripple to forge partnerships with
numerous financial institutions, positioning itself as a solution for cross-
border payments (Narayanan et al., 2016), Litecoin (LTC), created by
Charlie Lee in 2011, is often referred to as the "silver to Bitcoin's gold."
It offers faster transaction times and a different hashing algorithm
(Scrypt), making it a popular alternative for smaller transactions (Cheah
& Fry, 2015), Bitcoin Cash (BCH) emerged in 2017 as a result of a hard
fork from Bitcoin, aiming to address scalability issues by increasing the
block size limit. This has enabled Bitcoin Cash to process more
transactions per second compared to Bitcoin, though it has also led to
debates within the community about the best approach to scalability and
decentralization (Narayanan et al., 2016), Despite the proliferation of
altcoins, Bitcoin remains the most valuable and widely recognized
cryptocurrency. It accounts for a significant portion of the total market
capitalization of all cryptocurrencies and continues to set the benchmark
for the industry. Bitcoin's first-mover advantage, robust security, and
widespread recognition contribute to its dominance, even as newer
 11

cryptocurrencies introduce innovative features and use cases (Baur &

Dimpfl, 2021).

In conclusion, Bitcoin's significance in the financial markets is

underscored by its unique characteristics as a decentralized, secure, and
limited-supply asset. Its historical evolution from a niche digital currency
to a mainstream financial instrument highlights its resilience and
adaptability. While it faces competition from various altcoins, Bitcoin's
foundational role and continued influence in the cryptocurrency space
remain unparalleled.

2. Bitcoin as a Financial Asset

a. Bitcoin's Role as a Medium of Exchange and Store of Value
Bitcoin was initially conceptualized as a peer-to-peer electronic
cash framework, pointed at encouraging exchanges without the require
for middle people like banks (Nakamoto, 2008). Over time, Bitcoin has
advanced from this introductory vision to play double parts: a medium of
trade and a store of esteem.
As a medium of trade, Bitcoin empowers coordinate exchanges between
clients without the require for a trusted third party. This feature is
particularly valuable in regions with underdeveloped banking
infrastructure or in scenarios where traditional financial systems are
inefficient or unavailable. Bitcoin's decentralized nature means that it can
be used globally, providing a borderless financial instrument that operates
24/7. Despite these advantages, Bitcoin's widespread adoption as a
medium of exchange has been hindered by its high transaction fees during
peak periods and significant price volatility, which can deter its use for
everyday transactions (Narayanan et al., 2016).
In contrast, Bitcoin's role as a store of esteem. has gained considerable
attention, often being compared to gold. Bitcoin's fixed supply of 21
million coins makes it immune to inflationary pressures that affect fiat
currencies. This scarcity, combined with its decentralized and secure
 12

nature, positions Bitcoin as a potential hedge against economic instability

and currency devaluation (Baur & Dimpfl, 2021). Investors have
increasingly viewed Bitcoin as a "digital gold," using it to diversify their
portfolios and protect against macroeconomic uncertainties.

b. Volatility and Liquidity of Bitcoin Compared to Traditional Assets

One of the most distinguishing characteristics of Bitcoin is its
instability, Bitcoin's cost can encounter critical variances inside brief
periods, affected by a assortment of components counting showcase
estimation, administrative news, macroeconomic patterns, and innovative
advancements. For instance, Bitcoin's price surged from approximately
$10,000 in early 2020 to over $60,000 by April 2021, driven by increased
institutional interest and broader acceptance of cryptocurrencies.
Conversely, it also saw sharp declines, such as the one in 2018, when
prices fell by more than 80% from their peak (Conlon et al., 2021).
Compared to traditional assets like stocks, bonds, or gold, Bitcoin's
volatility is markedly higher. This significant volatility can be ascribed to
Bitcoin's comparatively smaller market size and its speculative
characteristics. of cryptocurrency investments, and the lack of mature
regulatory frameworks. Traditional assets tend to have more stable prices
due to their established market structures, regulatory oversight, and
broader investor base (Bouri et al., 2017).
Liquidity is another crucial aspect where Bitcoin differs from traditional
assets. While Bitcoin markets operate continuously without closing,
liquidity can vary significantly across different exchanges and times. High
liquidity is generally observed during peak trading hours when major
financial markets are open. However, during periods of market stress or
sudden price fluctuations, liquidity can diminish rapidly, resulting in even
greater price swings. Traditional assets typically benefit from higher and
more stable liquidity due to established trading venues and market
mechanisms (Cheah & Fry, 2015).
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c. Bitcoin's Potential as a Hedge Against Inflation and Economic Instability

Bitcoin's fixed supply and decentralized nature have led many to
view it as a potential safeguard against inflation and economic instability.
Conventional fiat currencies face inflationary pressures because
governments and central banks can increase the money supply, thereby
diminishing the currency's value over time. In contrast, Bitcoin, with its
limited supply of 21 million coins, is intended to be deflationary,
potentially preserving its value better than fiat currencies during periods
of high inflation (Bouri et al., 2017), Several studies have investigated
Bitcoin's efficacy as an inflation hedge. For example, Baur and Dimpfl
(2021) found that Bitcoin exhibited characteristics akin to those of gold,
serving as a safe haven during economic turbulence. Similarly, Conlon et
al. (2021) demonstrated that Bitcoin could act as a hedge against inflation
in the short term, particularly when inflation expectations are volatile,
however, Bitcoin's role as an inflation hedge is not without challenges. Its
considerable volatility can undermine its reliability as a stable store of
value. Additionally, the correlation between Bitcoin and traditional
financial markets can fluctuate over time, at times aligning more closely
with risk assets rather than with safe havens such as gold. This variability
can impact Bitcoin's effectiveness as a hedge across different economic
scenarios (Cheah & Fry, 2015). Despite these challenges, Bitcoin's
unique attributes make it an attractive option for diversification. Its
independence from traditional financial systems and its resilience against
government control provide a form of financial sovereignty that is
appealing to many investors. As such, Bitcoin can complement traditional
assets in a diversified portfolio, offering potential protection against
systemic risks and economic instability (Bouri et al., 2017).
In conclusion, Bitcoin's evolution as a financial asset highlights its
multifaceted roles as a medium of exchange and a store of value. Its high
volatility and liquidity dynamics distinguish it from traditional assets,
 14

presenting both opportunities and challenges for investors. While

Bitcoin's potential as a hedge against inflation and economic instability is
promising, it is accompanied by significant risks. As the cryptocurrency
market matures and regulatory frameworks develop, Bitcoin's role in the
financial landscape is likely to become more defined, offering further
insights into its long-term viability and utility.

3. U.S. Monetary Policy

a. Overview of U.S. Monetary Policy
U.S. monetary policy may be a vital angle of the country's financial
administration, essentially pointed at accomplishing most extreme
business, steady costs, and direct long-term interest rates. The central
institution responsible for defining and actualizing financial arrangement
within the Joined together States is the Government Save Framework,
commonly alluded to as the Government Save or the Encouraged. Set up
in 1913, the Government Save is composed of the Board of Governors in
Washington, D.C., and twelve territorial Government Save Banks over
major cities within the Joined together States. The Government Open
Showcase Committee (FOMC), which incorporates individuals of the
Board of Governors and territorial federal reserve Bank presidents, is the
essential body dependable for setting national money related approach
(Federal Reserve, 2023).
b. Mechanisms and Tools of U.S. Monetary Policy
The Federal Reserve utilizes a assortment of instruments to impact
financial action and oversee the cash supply. Key apparatuses incorporate
open showcase operations, the markdown rate, and save prerequisites.
1. Open Market Operations (OMO): Usually the foremost regularly utilized
instrument of the Federal Reserve. Through OMOs, the Fed buys or sells
U.S. Treasury securities within the open showcase to control the cash
supply. When the Encouraged buys securities, it infuses liquidity into the
economy, bringing down interest rates and empowering borrowing and
 15

investing. On the other hand, offering securities pulls back liquidity,

raising interest rates and checking expansion (Federal Reserve, 2023).
2. Discount Rate: The discount rate is the interest rate charged to commercial
banks and other safe educate for short-term advances they get from the
Government Save. Changes within the rebate rate can impact the loaning
behavior of banks and the generally level of financial action. A lower
markdown rate decreases the taken a toll of borrowing, stimulating
economic movement, whereas a better rate makes borrowing more costly,
abating down the economy (Mishkin, 2007).
3. Reserve Necessities: These are directions with respect to the least sum of
saves a bank must hold against stores. By modifying save necessities, the
Government Save can specifically impact the sum of cash that banks can
loan. Bringing down save prerequisites increments the cash supply and
advances loaning, though raising them has the inverse impact (Mishkin,
2007).
4. Quantitative Easing (QE): Quantitative easing is an unusual money
related approach instrument utilized by the Government Save when
conventional devices ended up incapable, especially when interest rates
are close zero. Beneath QE, the Encouraged buys long-term securities,
such as Treasury bonds and mortgage-backed securities, to add up the
cash supply and lower long-term interest rates. This arrangement points
to invigorate venture and investing amid periods of financial downturn
(Bernanke, 2020).
5. Forward Guidance: Forward direction could be a communication
instrument utilized by the Federal Reserve to impact desires around the
long run way of financial [Link] signaling future policy intentions,
the Fed can affect financial conditions and economic behavior even
without immediate changes in policy (Clarida, Gali, & Gertler, 1999).
 16

c . Historical Context of U.S. Monetary Policy Decisions and Their Impacts on

Financial Markets
U.S. monetary policy has undergone significant evolution and
adaptation in response to changing economic conditions over the decades.
Historical context provides valuable insights into how these policies have
shaped financial markets.
1. The Great Depression (1930s): The Federal Reserve's reaction to the
Great Depression highlighted the significance of proactive financial
approach. Amid the early 1930s, the Fed's disappointment to supply
satisfactory liquidity to the keeping money framework exacerbated the
financial downturn. The ensuing changes, counting the creation of the
Government Store of the Federal Deposit Insurance Corporation (FDIC)
and changes to the Fed's structure, aimed to prevent future financial crises
(Bernanke, 2002).
2. Post-World War II Era: The post-war period saw the Fed focusing on
stabilizing prices and promoting economic growth. The Bretton Woods
system, which pegged the U.S. dollar to gold, constrained the Fed's ability
to conduct independent monetary policy. The collapse of Bretton Woods
in the early 1970s allowed the Fed more flexibility to address domestic
economic challenges, such as inflation and unemployment (Mishkin,
2007).
3. The Volcker Era (Late 1970s - 1980s): Paul Volcker's tenure as Fed
Chairman marked a decisive shift towards combating inflation. Faced
with double-digit inflation rates, Volcker executed a tight financial policy,
essentially raising interest rates to control inflationary weights. In spite of
the fact that this approach driven to a retreat in the early 1980s, it
successfully restored price stability and set the stage for economic growth
in the subsequent decades (Taylor, 1993).
4. The Great Recession (2007-2009): The monetary emergency of 2007-
2009 provoked phenomenal financial arrangement measures. The
Government Save, beneath the administration of Ben Bernanke, sliced
 17

interest rates to approach zero and propelled a few rounds of quantitative

facilitating to stabilize money related markets and invigorate financial
[Link] actions expanded the Fed's balance sheet significantly
and played a crucial role in mitigating the economic downturn (Bernanke,
2020).
5. COVID-19 Pandemic: The COVID-19 widespread displayed unused
challenges for U.S. monetary arrangement. In reaction to the sharp
financial withdrawal, the Government Save rapidly cut interest rates to
approach zero and actualized broad resource buy programs. Also, forward
direction and crisis loaning offices were utilized to bolster monetary
markets and guarantee the stream of credit to family units and businesses.
These measures made a difference to stabilize markets and back financial
recuperation amid the uncommon wellbeing emergency (Federal Reserve,
2023).
In conclusion, U.S. monetary policy, managed by the Federal Reserve,
employs various tools and mechanisms to attain its objectives of most
extreme business, steady costs, and direct long-term interest rates.
Chronicled setting uncovers the advancing nature of money related
approach in reaction to financial challenges, with noteworthy impacts on
monetary markets. From combating the Extraordinary Misery to tending
to the money related emergency and the COVID-19 widespread,the
Federal Reserve's actions have been instrumental in shaping economic
outcomes and influencing market dynamics.

4. Interest Rate Announcements and Financial Markets

a. Theoretical Framework Explaining the Relationship Between Interest Rates
and Asset Prices
Interest rates play a crucial role in determining the value of
financial assets. According to traditional asset pricing theory, the worth of
an asset reflects the present value of its anticipated future cash flows
discounted at an appropriate rate. Interest rates directly impact this
discount rate, thereby influencing asset valuations. Lower interest rates
 18

reduce borrowing costs, promoting investment and expenditure,

potentially driving asset prices higher. Conversely, higher interest rates
elevate borrowing costs, restrain investment and spending, and typically
lead to lower asset prices. One prominent model that illustrates this
relationship is the Dividend Discount Model (DDM), which posits that a
stock's price is the present value of its expected future dividends. In this
model, an increase in interest rates raises the discount rate, thereby
reducing the present value of future dividends and, consequently, the
stock price (Sharpe, 1964). Regarding bonds, the Yield Curve holds
significant importance. It represents the interest rates of bonds across
various maturities and generally slopes upwards, indicating higher yields
for longer-term bonds. When interest rates increase, bond prices decline
because the fixed interest payments (coupons) become less appealing
compared to newly issued bonds offering higher rates. This inverse
relationship between bond prices and interest rates is fundamental in bond
valuation (Macaulay, 1938).
b. Empirical Studies on the Impact of Interest Rate Changes on Traditional
Financial Assets,
Observational research has broadly recorded the impacts of interest
rate changes on conventional budgetary resources. Thinks about appear
that stock markets are by and large delicate to changes in interest rates.
For case, Fama and French (1989) found that anticipated returns on stocks
are conversely related to changes in interest rates. Higher interest rates
increment the rebate rate, driving to lower stock costs as future profit are
marked down more intensely.
Bond markets exhibit a well-known sensitivity to interest rate changes.
Macaulay (1938) demonstrated that bond prices and interest rates are
inversely related, a principle that forms the basis of bond duration
analysis. Bernanke and Kuttner (2005) further analyzed the stock market's
response to monetary approach shocks, finding that startling increments
in interest rates lead to critical decays in stock costs.
 19

c. Specific Studies on the Impact of Interest Rate Changes on Cryptocurrencies,

Particularly Bitcoin
While the relationship between interest rates and traditional
financial assets is well-established, the impact of interest rate changes on
cryptocurrencies, especially Bitcoin, is a relatively new area of research.
Cryptocurrencies operate in a different market structure compared to
traditional assets, with unique factors influencing their prices.
1. Bitcoin as a Financial Asset: Bitcoin is often viewed both as a
speculative asset also a store of esteem, comparative to [Link] dual
nature complicates its relationship with macroeconomic variables like
interest rates. Baur et al. (2018) inspected whether Bitcoin acts more
like a medium of trade or a theoretical resource, finding that Bitcoin's
price movements are influenced by investor sentiment and market
speculation.
2. Interest Rate Sensitivity: Research on Bitcoin's sensitivity to interest
rates has produced mixed results. Liu and Tsyvinski (2018) found that
Bitcoin prices are less sensitive to traditional macroeconomic
variables, including interest rates, compared to stocks and bonds.
They contend that Bitcoin's cost is essentially driven by advertise
opinion and theoretical exchanging.
3. Empirical Evidence: Some studies suggest a linkage between Bitcoin
prices and interest rates through the broader financial market
conditions. For instance, Dyhrberg (2016) used GARCH models to
analyze Bitcoin's hedging capabilities, suggesting that Bitcoin can
hedge against adverse macroeconomic conditions, similar to gold.
This implies that in periods of low interest rates, which often correlate
with economic uncertainty, Bitcoin might attract more investment as
a safe haven asset.
4. Bitcoin and Monetary Policy Announcements: Corbet et al. (2020)
explored the reaction of cryptocurrencies to monetary policy
announcements. They found that Bitcoin exhibits a significant
response to Federal Reserve announcements, with price volatility
 20

increasing around these events. This suggests that while Bitcoin is

often touted as being independent of traditional financial systems, it
still reacts to significant macroeconomic policy changes.
5. Market Integration: The integration of cryptocurrency markets with
traditional financial markets is another factor that influences their
response to interest rate changes. Bouri et al. (2017) investigated the
cross-market linkages and found evidence of spillover effects from
traditional financial markets to Bitcoin. This means that interest rate
changes impacting traditional assets could indirectly affect Bitcoin
prices through market sentiment and liquidity channels.

In summary, the theoretical framework explaining the relationship

between interest rates and asset prices underscores the importance of the
discount rate in asset valuation. Empirical studies on traditional financial
assets confirm the significant impact of interest rate changes on stocks
and bonds. In contrast, the impact of interest rate changes on
cryptocurrencies like Bitcoin is less clear-cut. While Bitcoin is influenced
by broader financial market conditions and monetary policy
announcements, its unique market dynamics and speculative nature result
in a complex and evolving relationship with interest rates.

5. Consumer Price Index (CPI) and Financial Markets

a. Explanation of the Consumer Price Index (CPI) and Its Importance as an
Economic Indicator

The Consumer Price Index (CPI) is one of the foremost basic

financial pointers utilized to degree inflation. The CPI tracks the changes
within the cost level of a advertise bushel of buyer merchandise and
administrations obtained by families. It is calculated by taking cost
changes for each thing within the foreordained bushel of products and
averaging them. Costs are collected periodically to maintain the accuracy
of this measure.
 21

The CPI is crucial for several reasons. First, it serves as a key indicator of
inflation, helping policymakers, investors, and businesses understand the
rate at which prices are rising in the economy. Inflation data, as measured
by the CPI, influences monetary policy decisions, especially those related
to interest rates. For example, central banks, such as the Federal Reserve
in the United States, may increase interest rates to combat high inflation,
thereby impacting borrowing costs and economic activity (U.S. Bureau of
Labor Statistics).

Second, the CPI is used to adjust other economic indicators for inflation,
giving a clearer portrait of financial patterns over time. It is additionally
utilized to alter compensation, annuities, and social security installments
to preserve obtaining control in the midst of rising costs.

b. The Relationship Between Inflation, CPI, and Asset Prices

The relationship between inflation, as measured by the CPI, and

asset prices is multifaceted and depends on different components,
counting the sort of resource and the by and large financial environment.
Inflation affects the real returns on investments and influences investor
behavior and asset allocation decisions.

Stocks: Generally, moderate inflation is associated with economic growth,

which can lead to incrase in corporate earnings and, consequently, and
increase in stock prices. However, high inflation can erode profit margins
due to increased costs of goods and services, leading to lower stock prices.
Additionally, high inflation often prompts central banks to increase
interest rates to control price levels, which can negatively affect stock
valuations. According to Fama (1981), stock returns are inversely related
to expected inflation because higher inflation leads to higher discount
rates and lower future cash flows.

Bonds: Inflation diminishes the purchasing power of the fixed payments

that bonds offer. As a result, when inflation expectations grow, bond
yields typically rise to compensate for the decreased purchasing power,
 22

causing bond prices to fall. The Fisher Effect, named after economist
Irving Fisher, indicates that nominal interest rates are composed of the
real interest rate plus expected inflation. Thus, as inflation escalates,
nominal interest rates and bond yields go up, leading to a reduction in
bond prices. (Mishkin, 2007).

Real Estate: Real estate is frequently seen as a strong safe guard against
inflation since property values and rental incomes generally increase
along with inflation. However, the impact of inflation on real estate can
vary based on the property type, location, and overall economic
conditions. Case and Shiller (2003) showed that housing prices could be
significantly influenced by inflation expectations and economic
fundamentals.

Commodities and Cryptocurrencies: Commodities, including gold and

oil, are traditionally seen as hedges against inflation because their prices
tend to rise when inflation increases. Similarly, some investors consider
Bitcoin and other cryptocurrencies as potential fences against swelling
due to their restricted supply and decentralized nature. However, the high
volatility of cryptocurrencies can make them less predictable compared to
traditional inflation hedges.

c. Empirical Studies on the Impact of CPI Fluctuations on Traditional Financial

Assets and Bitcoin

Numerous empirical studies have explored the impact of CPI fluctuations

on various financial assets, providing insights into how inflation
influences market dynamics.

1. Stocks and Bonds: Bryan and Cecchetti (1993) found that core
inflation, which avoids unstable nourishment and vitality costs, may
be a more steady indicator of inflationary patterns and can
significantly affect stock and bond returns. Their research suggests
that investors closely monitor CPI data to gauge future monetary
policy actions and adjust their portfolios accordingly.
 23

2. Gold and Commodities: Baur and Lucey (2010) analyzed the

relationship between gold costs and inflation, concluding that gold
serves as a fence against expansion over the long term. They found
that amid periods of tall swelling, gold costs tend to rise, preserving
purchasing power. Similar patterns have been observed for other
commodities, which are influenced by CPI as their prices often move
in tandem with inflationary pressures.
3. Matkovskyy and Jalan (2020) used a quantile-on-quantile approach to
investigate Bitcoin's response to inflation, finding that Bitcoin could
potentially serve as a hedge during specific market conditions,
particularly when traditional assets are underperforming due to high
inflation. However, they also noted that Bitcoin's price movements are
heavily influenced by speculative trading, which can obscure its
relationship with inflation indicators like the CPI.
4. Empirical Evidence from 2022: The year 2022 witnessed significant
inflationary pressures globally, driven by supply chain disruptions,
geopolitical tensions, and economic recovery post-COVID-19. This
period provided a unique context to study the impact of CPI on Bitcoin
prices. Studies showed mixed results, with some indicating a positive
correlation between rising CPI and Bitcoin prices, while others
highlighted the overriding influence of market sentiment and
speculative activities. Corbet et al. (2020) found that while Bitcoin
showed potential as an inflation hedge, its price was more responsive
to broader financial market conditions and investor behavior.

6. Combined Impact of Interest Rates and CPI on Asset Prices

a. Theoretical Insights into How Simultaneous Changes in Interest Rates and
CPI Affect Financial Markets

Understanding the combined impact of interest rates and the

Consumer Price Index (CPI) on asset prices requires an integrated view
of monetary policy and inflation dynamics. Theoretically, both interest
 24

rates and CPI are crucial determinants of financial market performance,

influencing investor behavior and market valuations through different yet
interconnected mechanisms.

Interest Rates: Central banks, like the Federal Reserve, use interest
rates as a primary tool to control economic activity and inflation. When
the Federal Reserve raises interest rates, borrowing costs increase,
reducing consumer spending and business investments. This cooling
effect on the economy makes a difference to control expansion but can as
well direct down monetary improvement. Then again, bringing down
interest rates invigorates monetary development by making borrowing
cheaper, possibly expanding inflation in case the economy overheats.

Consumer Price Index (CPI): CPI measures inflation by following

changes within the costs of a wicker container of products and
administrations over time. Rising CPI demonstrates expanding expansion,
which can dissolve acquiring control and affect consumer and investor
confidence. Persistent inflation often leads to higher interest rates as
central banks endeavor to curb in cost increments. Then again, moo or
negative CPI development (collapse) can lead to lower interest rates to
invigorate financial movement.

Combined Impact: The interaction between interest rates and CPI

is complex. Rising inflation (CPI) typically prompts central banks to
expand interest rates to dodge the economy from overheating, while
falling swelling can lead to lower interest rates to spur [Link]
combined impact on resource costs depends on showcase desires and the
relative adjust of inflationary weights and money related arrangement
activities. For example, if the CPI is rising but the central bank delays
increasing interest rates, the inflationary environment might initially
boost asset prices as economic activity remains high. However, once the
central bank acts to increase rates, the higher borrowing costs can lead to
a market correction. Alternatively, if both CPI and interest rates rise
simultaneously, the negative impact of higher borrowing costs might
 25

outweigh any initial gains from economic growth, leading to declining

asset prices.

b. Empirical Evidence on the Joint Impact of Interest Rates and CPI on

Traditional Assets

Stocks and Bonds: Empirical studies have extensively explored the

combined effects of interest rates and CPI on stock and bond markets.
Fama and Schwert (1977) found that both expected and unexpected
inflation negatively impact stock returns, as rising CPI and subsequent
interest rate hikes increase discount rates and reduce the present value of
future cash flows. Conversely, bonds typically suffer during rising
inflation periods due to the erosion of fixed interest payments' purchasing
power. As Modigliani and Cohn (1979) highlighted, rising interest rates
further depress bond prices as yields adjust upwards.

Real Estate: Real estate markets also respond to the combined effects of
interest rates and CPI. Higher interest rates increase mortgage costs,
potentially dampening property demand and prices. However, real estate
is often viewed as a hedge against inflation, as property values and rental
incomes typically rise with CPI. Gyourko and Linneman (1988) showed
that while short-term interest rate hikes might depress real estate prices,
long-term inflation trends tend to support property values.

Commodities: Commodities, including precious metals like gold, are

traditionally seen as inflation hedges. Rising CPI typically boosts
commodity prices as investors seek to preserve purchasing power. Be that
as it may, the affect of interest rates can change. For occasion, higher
interest rates increment the opportunity taken a toll of holding non-
yielding resources like gold, possibly offsetting some inflationary gains.
Bodie (1976) provided evidence that commodity prices tend to move in
tandem with inflation, but the relationship can be influenced by monetary
policy actions.
 26

c. Studies Examining the Combined Impact of These Factors on Bitcoin and

Other Cryptocurrencies

The burgeoning field of cryptocurrency research has started to investigate

how traditional economic indicators like interest rates and CPI influence
digital assets like Bitcoin. While cryptocurrencies operate in a unique
market environment, the principles governing traditional asset reactions
to economic indicators can still provide valuable insights.

1. Bitcoin's Unique Position: Unlike traditional assets, Bitcoin and other

cryptocurrencies are decentralized and operate outside the traditional
banking system. This unique positioning can lead to different
reactions to economic indicators. For instance, Bitcoin is often viewed
as a hedge against fiat currency devaluation and systemic financial
risks. Dyhrberg (2016) suggested that Bitcoin exhibits hedging
capabilities similar to gold, reacting positively to inflationary
pressures.
2. Empirical Findings: Several empirical studies have started to shed
light on the combined impact of interest rates and CPI on Bitcoin.
Bouri et al. (2017) found that Bitcoin shows potential as a safe haven
during periods of economic instability and high inflation, suggesting
that rising CPI could positively influence Bitcoin prices. However, the
study also noted that Bitcoin's extreme volatility could undermine its
effectiveness as a stable inflation hedge.
3. Corbet et al. (2019) examined the response of Bitcoin prices to
changes in U.S. interest rates and CPI, finding mixed results. While
rising CPI initially appeared to boost Bitcoin prices, subsequent
interest rate hikes tended to dampen this effect as higher borrowing
costs reduced speculative investment in cryptocurrencies. The study
highlighted that Bitcoin's cost developments are intensely impacted
by showcase assumption and speculative exchanging,making it
 27

difficult to predict its response to traditional economic indicators

consistently.
4. Comprehensive Analysis: A more comprehensive analysis by Liu and
Tsyvinski (2018) explored the broader implications of
macroeconomic factors on cryptocurrency prices, including Bitcoin.
Their research suggested that while Bitcoin does react to changes in
interest rates and CPI, its price dynamics are more heavily driven by
cryptocurrency-specific factors, such as technological developments,
regulatory news, and market liquidity. This finding underscores the
unique nature of Bitcoin compared to traditional assets and the
importance of considering a wider range of factors when analyzing its
price movements.

7. Gaps in Existing Literature

a. Identification of Gaps in Existing Research Related to the Impact of U.S.

Monetary Policy on Bitcoin Prices

The growing body of literature on Bitcoin and its relationship with

macroeconomic factors, including U.S. monetary policy, has provided
valuable insights into the behavior of cryptocurrencies. However,
significant gaps remain in our understanding, warranting further
exploration.

1. Complex Interactions Between Variables: The relationship between

Bitcoin prices, interest rates, and CPI is multifaceted, involving complex
interactions between various macroeconomic and market-specific factors.
Existing research often treats these variables in isolation, failing to
capture the dynamic interplay between them. For example, studies might
examine the impact of interest rate changes on Bitcoin prices without
considering how simultaneous changes in CPI or other economic
indicators might modulate this effect. There is a need for comprehensive
models that integrate multiple macroeconomic variables to offer a
comprehensive understanding of Bitcoin's price dynamics..
 28

2. Diverse Market Conditions and Events: Bitcoin markets are affected by a

wide run of variables, counting administrative changes, mechanical impr
ovements, advertise opinion,and macroeconomic conditions. Existing
studies often fail to account for the diversity of market conditions and
events that can impact Bitcoin prices. For instance, while some research
has explored the impact of U.S. monetary policy during stable economic
periods, there is limited understanding of how Bitcoin responds to
monetary policy during periods of economic crisis or heightened market
volatility. This gap underscores the need for studies that examine Bitcoin's
behavior across different market conditions and economic cycles.

3. Regional Differences in Monetary Policy Impact: While much of the

current literature emphasizes the influence of U.S. monetary policy on
Bitcoin prices,there is a lack of research exploring how monetary policies
in other major economies, such as the European Union, Japan, or China,
influence Bitcoin markets. Given Bitcoin's global nature, understanding
regional differences in monetary policy impact is crucial for a
comprehensive understanding of its price dynamics. Comparative studies
that analyze the effects of monetary policies from multiple regions can
provide valuable insights into Bitcoin's behavior in a global context.

4. Micro-Level Analysis of Market Participants: Most studies on Bitcoin and

monetary policy focus on aggregate market data, neglecting the behavior
of individual market participants. There is limited understanding of how
different types of investors, such as retail traders, institutional investors,
and algorithmic trading firms, respond to changes in interest rates and
CPI. Micro-level analyses that examine the behavior of different market
participants can provide deeper insights into the mechanisms driving
Bitcoin's price movements and help identify potential market
manipulation or herding behavior.

[Link] for the Need for This Study Based on the Identified Gaps

The identified gaps in the existing literature highlight the need for
a comprehensive study that addresses these limitations and provide a
 29

deeper insight into the impact of U.S. monetary policy on Bitcoin prices.
This study seeks to fill these gaps by delivering a thorough analysis of
Bitcoin's price dynamics in response to interest rate changes and CPI
fluctuations, taking into account various factors. and conditions that
influence these relationships.

1. Integrated Macro-Economic Models: This study will develop

comprehensive models that integrate multiple macroeconomic variables,
including interest rates, CPI. By considering the dynamic interactions
between these variables, the research will offer a holistic view of Bitcoin's
price dynamics and improve the accuracy of predictive models.

2. Diverse Market Conditions: To address the gap related to diverse market

conditions, this study will analyze Bitcoin's response to U.S. monetary
policy across different economic cycles and market environments. This
approach will provide insights into how Bitcoin behaves during periods
of stability, crisis, and heightened volatility, offering valuable information
for investors and policymakers.

B. Previous Researchs

In previous research, a considerable amount of studies have explored aspects

of the subject to be investigated. These prior studies serve as a crucial foundation
underpinning this research, providing a comprehensive overview of the efforts
made in previous research to delve into dimensions of the chosen research area. By
examining the existing literature, this subsection traces the theoretical groundwork,
empirical insights, and significant findings of past researchers, thereby establishing
context and contributing to the intellectual discourse surrounding the existing
research questions. The synthesis of previous research not only helps in identifying
gaps and opportunities for further investigation but also guides the formulation of
hypotheses and research objectives, ultimately facilitating a more informed and
robust research effort. The following are some of the previous studies that are
referenced in the current research:
 30

1- Tijn van Outvorst (2022), "The Effect of Interest Rates on Traditional and
Cryptocurrency Investments": This study examined variables including
investment amounts in cryptocurrencies (Bitcoins) and traditional assets (AEX
Stocks), interest rates (0%, 0.25%, 2%, 4%), participants' trust in the financial
system, participants' self-assessed risk attitude, expected annual returns for
investments, demographic information (age, gender), and real-life investment
behavior in stocks/cryptocurrencies. Using regression models, descriptive
statistics, robustness checks, and an experimental survey design, it was found that
there was no significant effect of interest rate changes on investment behavior in
both traditional and cryptocurrency assets. There was also no notable difference
in the reaction of traditional and cryptocurrency investors to interest rate changes.
Variables like self-assessed risk attitude, trust in the financial system, and
demographic factors (age, gender) had significant effects on investment behavior,
and the research contradicted some previous studies by failing to establish a
negative correlation between interest rates and risky asset investments.

2- Thai Vu Hong Nguyen, Binh Thanh Nguyen, Kien Son Nguyen, and Huy
Pham (2019), "Asymmetric Monetary Policy Effects on Cryptocurrency
Markets": This research focused on cryptocurrency returns (specifically Bitcoin,
Ethereum, Litecoin, Ripple), U.S. and Chinese Open Market Operations (OMO)
rates, NASDAQ returns, the 10-year U.S. treasury rate, oil price growth rate,
USD/EUR exchange rate growth rate, CNY/USD exchange rate growth rate, and
cryptocurrency supply and demand growth rates. Using the Generalized Method
of Moments (GMM) estimator and Fixed Effects estimator, it was found that
cryptocurrency returns, especially Bitcoin, show significant positive responses to
Chinese monetary policy tightening but not to U.S. monetary policies. Significant
effects were also observed with changes in the U.S. OMO rate. The study
suggested cryptocurrencies, particularly in China, might be influenced by capital
flight from traditional stock markets during periods of monetary tightening,
although there was no consistent evidence of cryptocurrencies responding to
easing monetary policies.

3- Shaen Corbet, Charles Larkin, Brian Lucey, Andrew Meegan, and Larisa
Yarovaya (2019), "Cryptocurrency Reaction to FOMC Announcements:
 31

Evidence of Heterogeneity Based on Blockchain Stack Position": This study

analyzed digital assets categories (currencies, protocols, decentralized
applications (dApps)), asset classification (mineable vs. non-mineable digital
assets), market reactions (volatility spillovers, market behavior following U.S.
monetary policy announcements), and asset-specific characteristics (market
capitalization, public awareness, underlying technology). Using GARCH-family
methodologies (specifically EGARCH), Research revealed that digital assets
based on currency exhibited notable individual impacts following U.S. monetary
policy announcements. Conversely, digital assets rooted in applications or
protocols largely avoided volatility transfers from policy shifts. Assets that are
minable proved more sensitive to monetary policy volatility transfers compared
to those that are not. The cryptocurrency market was observed to be highly
varied.; not all assets were comparable to Bitcoin in their response to monetary
policy changes. Currency-based assets saw an increase in global systematic
volatility spillovers following a monetary policy announcement, whereas
protocols experienced a decrease. Decentralized applications (dApps) remained
mostly unaffected.

4- Sören Karau (2023), "Monetary Policy and Cryptocurrencies": This research

focused on Bitcoin prices (USD and EUR), high-frequency trading data, weekly
Proxy VAR (Vector Autoregression), ECB and FOMC announcements, exchange
rates, stock indices (e.g., S&P 500, EURO STOXX 50), blockchain transaction
data, mining activity and hashrates, and international Bitcoin valuations. Using
high-frequency data analysis, structural VAR analysis, and blockchain data
analysis, it was found that ECB tightening generally lowers Bitcoin valuations,
in line with Bitcoin being perceived as digital gold, while Fed tightening
increases Bitcoin prices, indicating a unique response compared to other financial
assets. The study supported the view of Bitcoin as a hedge against inflationary
monetary policy, especially in response to ECB policies. Post-Fed tightening,
there was an increased demand for Bitcoin in emerging markets, suggesting its
role as international digital cash during global economic downturns. The paper
highlighted the complexity of Bitcoin’s response to monetary policy, influenced
by factors such as global financial conditions, technological attributes, and
 32

institutional particularities of cryptocurrencies. The research underscored the

significance of cryptocurrencies in monetary policy considerations, their role in
cross-border transactions, and their potential as both speculative investments and
tools for capital flight.

5- Elias Atmander (2021), "Federal Funds Rate on Bitcoin Volatility": This study
analyzed Bitcoin prices and federal funds rate changes over the period from April
1, 2014, to April 1, 2020. Using GARCH (1,1) and EGARCH (1,1) models, and
Using a dummy variable method to examine Bitcoin volatility effects, researchers
discovered that Bitcoin remains unaffected by announcements regarding changes
in the federal funds rate. This finding supports the hypothesis that Bitcoin is
insulated from fluctuations in the federal funds rate. The use of GARCH and
EGARCH models revealed interesting dynamics in Bitcoin's response to
monetary policy changes, suggesting that Bitcoin behaves independently of
traditional monetary policy tools, reinforcing its characterization as a
decentralized asset.

6- Shaen Corbet, Grace McHugh, and Andrew Meegan (2017), "The Influence
of Central Bank Monetary Policy Announcements on Cryptocurrency Return
Volatility": This study examined cryptocurrency return volatility, specifically
Bitcoin returns, interest rate decisions, and quantitative easing (QE)
announcements by the Federal Open Market Committee (US), the European
Central Bank (EU), the Bank of England (UK), and the Bank of Japan. Using
GARCH (1,1) and Ordinary Least Squares (OLS) methodologies, it was found
Interest rate decisions made by the Federal Open Market Committee in the United
States have a notable impact on Bitcoin volatility. Specifically, when interest rates
increase, Bitcoin volatility tends to rise as well, while reductions result in
decreased volatility. Announcements regarding QE by the US, EU, UK, and Japan
have a substantial influence on Bitcoin return volatility, with increases in QE
programs significantly escalating Bitcoin return volatility. Despite its
decentralized nature, Bitcoin is sensitive to government policies, particularly
monetary policies, exhibiting characteristics of both traditional fiat currencies
and store-of-value assets like gold.
 33

7- Ahmed H. Elsayed & Ricardo M. Sousa (2022), "International Monetary

Policy and Cryptocurrency Markets: Dynamic and Spillover Effects": This study
focused on international monetary policies of the Eurozone, Japan, UK, and US,
and cryptocurrency returns (Bitcoin, Litecoin, Ripple). Using the Time-Varying
Parameter Vector Auto-Regression (TVP-VAR) model, dynamic connectedness
approach, and network analysis, it was found that there are significant
interactions and spillovers between the monetary policies of the studied
economies and cryptocurrency markets. Cryptocurrency returns and the influence
of monetary policy were particularly pronounced during periods when shadow
policy rates turned negative. Gross directional spillovers indicated that shadow
policy rates had a greater impact on other variables than they received.
Cryptocurrencies like Bitcoin and Litecoin showed strong interconnectedness,
but overall spillovers across monetary policy and cryptocurrencies were muted.
The research suggested only a slightly larger spillover during unconventional
monetary policy periods compared to standard periods, but the composition of
these spillovers changed over time.

8- Filip Lundqvist and Christian Olivefors (2022), "Central Banks' Effect on

Bitcoin Returns": This study analyzed Bitcoin’s returns and central bank
statements from the ECB and FED, categorizing them into positive, negative, and
neutral impacts. Using regression analysis and event study methodology, it was
found that few instances where central bank statements had a statistically
significant impact on Bitcoin's returns. The timing and content of the speeches
might influence Bitcoin's returns, but the study could not definitively establish
this link. The research highlighted Bitcoin's volatile nature and its complex
relationship with the financial system, suggesting the need for further research in
areas like monetary policy tools, energy prices, and regulatory impacts.

9- Shaen Corbet, Charles Larkin, Brian M. Lucey, Andrew Meegan, and Larisa
Yarovaya (2020), "The Impact of Macroeconomic News on Bitcoin Returns":
This research examined Bitcoin returns in response to macroeconomic news,
Analyzing GDP, unemployment, Consumer Price Index (CPI), and durable goods
through sentiment index construction from news stories following
macroeconomic indicator announcements, the study revealed that positive news
 34

regarding unemployment and durable goods correlated with decreased Bitcoin

returns, whereas negative news correlated with increased returns. However, the
study did not find a statistically significant relationship between Bitcoin returns
and news concerning GDP and CPI, suggesting that the cryptocurrency market,
particularly Bitcoin, is maturing and increasingly interacting with
macroeconomic news, similar to traditional financial markets.

10- Syed Abul Basher and Perry Sadorsky (2022), "Forecasting Bitcoin Price
Direction with Random Forests: How Important Are Interest Rates, Inflation, and
Market Volatility?": This study focused on interest rates, inflation, market
volatility, technical indicators, and macroeconomic factors. Using regression
models, descriptive statistics, and robustness checks, it was found that Random
forests demonstrate higher accuracy in predicting the direction of Bitcoin and
gold prices compared to logit models. For a five-day forecast, prediction
accuracies for bagging and random forests range between 75% and 80%,
increasing to over 85% for forecasts spanning 10 to 20 days. Technical indicators
emerged as the most crucial features for forecasting Bitcoin and gold price
movements, implying potential market inefficiencies. Additionally, oil price
volatility played a significant role in predicting Bitcoin and gold prices,
highlighting Bitcoin's role as a substitute for gold in diversifying this type of
volatility. Moreover, gold prices exhibited greater sensitivity to inflation
compared to Bitcoin prices, suggesting that gold can serve as a hedge or
diversification asset against inflation.

11- L.A. Smales (2022), "Cryptocurrency as an Alternative Inflation Hedge?":

This study examined the returns of Bitcoin and other cryptocurrencies, changes
in US inflation expectations, gold returns, cryptocurrency market uncertainty,
economic policy uncertainty, financial markets uncertainty, credit conditions
term structure, and Consumer Price Index (CPI). Using Ordinary Least Squares
(OLS) regression model, Spearman rank-order coefficients, Bai and Perron
method for identifying structural breaks, and standardized surprise measure for
CPI announcements, it was found that cryptocurrency returns show a positive
relationship with changes in US inflation expectations under specific conditions,
such as short-term inflation expectations and when inflation or market-implied
 35

inflation expectations are below 2%. Unlike gold, the identified relationship for
cryptocurrencies was not significant during periods of high inflation or high
inflation expectations cryptocurrency returns typically showed lower
performance on days when monthly CPI announcements were made, and they
responded negatively to CPI surprises. This suggests that cryptocurrencies may
not serve effectively as a hedge against inflation, Gold, in contrast, demonstrated
more consistent inflation hedging properties, maintaining a positive relationship
with inflation expectations even when inflation rose above 3%. The study's
conclusion was that cryptocurrencies currently do not provide investors with a
viable alternative to gold for hedging against inflation.

12- Roman Matkovskyy and Akanksha Jalan (2020), "Bitcoin vs Inflation: Can
Bitcoin Be a Macro Hedge? Evidence from a Quantile-on-Quantile Model": This
study focused on Bitcoin market returns in the United States, Eurozone, United
Kingdom, and Japan, as well as realized and unexpected inflation. Using quantile-
on-quantile regression, it was found that the relationship between Bitcoin returns
and inflation (both realized and unexpected) is asymmetric and depends on
market states and levels of inflation. In bullish markets of the UK, Euro, and
Japan, Bitcoin offers higher returns, facilitating hedging against inflation. In
contrast, the US Bitcoin market showed weaker performance with rising
inflation. The study revealed that Bitcoin’s return-inflation relationship varies
significantly based on the magnitude of inflation shocks and investor sentiment
in Bitcoin markets. Bitcoin in GBP and JPY markets showed significant hedging
capabilities against inflation, especially in bullish states, offering 'safe haven'
characteristics. The US Bitcoin market, however, underperformed with higher
levels of inflation. The study suggested Bitcoin can serve as a macro hedge
against realized inflation in bullish Euro, GBP, and JPY markets, but not in the
USD market.

In conclusion, the extensive exploration of prior research in this section

highlights the depth and breadth of knowledge that underlies this study. Insights
gained from these studies have clarified the diverse nature and outcomes of the
research field, providing valuable perspectives, methodologies, and conceptual
frameworks. With this foundational knowledge as a backdrop, the subsequent
 36

chapters of this thesis aim to advance the discourse, build upon existing insights,
and contribute new perspectives to research in the domain of the impact of U.S.
monetary policy changes on Bitcoin price, specifically analyzing federal interest
rate and CPI announcements in 2022.

C. Conceptual Framework

The Impact of U.S. Interest Rates on Bitcoin Price

The relationship between U.S. interest rates and Bitcoin price is a critical
area of study. Interest rates, determined by the Federal Reserve, are a
fundamental tool of monetary policy that influence economic activities.
When the Federal Reserve raises interest rates, it generally leads to a
stronger U.S. dollar and makes borrowing more expensive. This
environment often results in a shift of investment from high-risk assets,
such as Bitcoin, to more stable, income-generating investments like bonds.
On the flip side, when interest rates are reduced, borrowing costs decrease,
which stimulates investment. in riskier assets like Bitcoin. This
relationship supports Hypothesis 1, which posits that changes in U.S.
interest rates negatively affect Bitcoin price. Study by Shaen Corbet, Grace
McHugh, and Andrew Meegan (2017) suggest that there is often a negative
correlation between Bitcoin prices and U.S. interest rates, indicating that
rate hikes can lead to price drops in Bitcoin.

The Impact of U.S. Consumer Price Index (CPI) on Bitcoin Price

The Consumer Price Index (CPI) is a critical measure of inflation,

indicating the average price change consumers pay for goods and services.
Variations in the CPI can significantly impact investor sentiment and
behavior. A rising CPI indicates increasing inflation, which can diminish
the purchasing power of traditional fiat currencies. In such scenarios,
Bitcoin, often viewed as a hedge against inflation, might attract more
investment, potentially driving up its price. This relationship supports
Hypothesis 2, which posits that there exists a positive correlation between
monthly fluctuations in the CPI and Bitcoin price. However, the
 37

relationship is complex, as highlighted by Sören Karau (2023), who found

limited evidence of Bitcoin acting as a reliable inflation hedge. The impact
of CPI changes on Bitcoin prices requires a nuanced analysis, considering
factors such as market expectations and investor sentiment towards
inflation.

The Combined Impact of U.S. Interest Rates and CPI on Bitcoin Price

The simultaneous changes in U.S. interest rates and CPI create a

multifaceted influence on Bitcoin price. Both these macroeconomic
variables interact in ways that can amplify or mitigate their individual
effects on Bitcoin. For instance, a scenario where the Federal Reserve
increases interest rates to address escalating inflation (as indicated by a
high CPI) can lead to complex market reactions. Investors might
simultaneously face the appeal of higher returns from interest-bearing
assets and the need to hedge against inflation by investing in Bitcoin. This
relationship supports Hypothesis 3, which posits that simultaneous
changes in U.S. interest rates and the CPI significantly impact Bitcoin price
Research by Shaen Corbet, Charles Larkin, Brian M. Lucey, Andrew
Meegan, and Larisa Yarovaya (2020), underscores the importance of
considering both interest rates and CPI together to understand their
combined impact on Bitcoin prices. The dynamic interplay between these
variables and their collective influence on Bitcoin necessitates a
comprehensive econometric analysis to unravel the underlying
mechanisms.

D. Research Paradigm

Based on the aforementioned descriptions, the influence of each

independent variable on the dependent variable can be illustrated in the
paradigm model shown in Figure 2.2 below
 38

US H1
V
Interest
Rate

H3
Bitcoin
Price
US .
Consumer r
Price Index x H2

Figure 1. : research paradigm

Informations :

H1 : The Impact Of Us Interest Rate On Bitcoin Price.

H2 : The Impact Of Us Consumer Price Index (CPI) On Bitcoin Price.

H3 : The Impact Of US interest rate, Consumer Price Index CPI

Simultaneously On Bitcoin Price.

E. Hypotheses

A hypothesis is a statement whose truth has not yet been tested. Therefore,
it needs to be supported by data and tested with the available data to either accept
or reject the proposed hypothesis. Based on the problem formulation and the
conceptual framework, the hypothesis of this research is:

H 1: Changes in U.S. interest rates negatively affect Bitcoin price.

H 2: There exists a positive correlation between monthly fluctuations in the

Consumer Price Index (CPI) and Bitcoin price.

H 3: Simultaneous changes in U.S. interest rates and the Consumer Price Index
(CPI) significantly impact Bitcoin price.