Examining tools of US monetary policy and the price of Bitcoin

The thesis aims to use quantitative data to capture the relationship between variables of US monetary policy and the price of Bitcoin using a Vector Autoregressive (VAR) model. I will use a mixed frequency model, using macroeconomic variables like the federal funds rate, Harmonised Index of Consumer Prices (HICP), and M1 money supply that are reported monthly and daily bitcoin data. The daily data on the bitcoin price will be aggregated into a weekly frequency using the averaging method. With this data, the thesis aims to find out: How does the price of Bitcoin respond to changes in US monetary policy variables? What is the impact of M1 Money Supply, HICP and the Federal Fund Rates on the price of Bitcoin and vice versa? I hypothesise that an increase in US inflation (leading to an increase in the federal funds rate) could decrease the price of Bitcoin, as higher borrowing costs could discourage speculative investments. Similarly, an increase in money supply could lead to an increase in the price of Bitcoin, as more money in circulation and a more robust economy could increase demand for alternative assets. Finally, an increase in CPI could lead to an increase in the price of bitcoin as investors seek to protect their purchasing power against inflationary pressures. Monetary policy decisions based on interest rates taken by the Federal Open Market Committee in the United States significantly impact bitcoin returns (Corbet, 2017), and (Wang, 2017) finds that inflation, interest rates, and money supply will affect Bitcoin returns.