On the resilience of cryptocurrencies: A quantile-frequency analysis of bitcoin and ethereum reactions in times of inflation and financial instability

Abstract

This study examines the resilience of Bitcoin and Ethereum to inflation and financial instability amidst major economic and political disruptions, including the U.S.-China trade war, the COVID-19 pandemic, the Ukrainian conflict, the collapse of Silicon Valley Bank, and the ensuing energy crisis. We employ wavelet coherence analysis and the quantile coherence method to unravel the complex relationship between these cryptocurrency prices, the 5-year breakeven inflation rate, and the U.S. Financial Stress Index (FSI), utilizing daily data from April 16, 2018, to April 14, 2023. Our results reveal that during turbulent times, investors adjust their Bitcoin holdings in response to inflation expectations, driving up Bitcoin prices in both the short and long term. However, Bitcoin’s effectiveness as an inflation hedge diminishes in bearish market conditions, and it proves unreliable as a hedge against financial instability. The relationship between Ethereum and inflation expectations is found to be more context-dependent. Also, while Ethereum’s vulnerability to financial instability is less persistent in the long run, it increases in bearish markets.