Analysis of Federal Reserve Policy Rates and Bitcoin Prices: Pre and Post COVID-19 Differentiations

Abstract

This study aims to conduct a comparative analysis of the relationship between policy interest rates declared by the Federal Reserve and Bitcoin prices, taking into account both pre and post-COVID-19 periods. Employing a robust analytical framework based on Vector Error Correction Model, scrutinizing each phase individually. In the pre-COVID-19 period, a notable VECM coefficient of -0.03 for Bitcoin variable implies shock stabilization after approximately 33 weeks, while the FED Policy Rate variable lacks significance in the return-to-balance mechanism. Conversely, the post-COVID-19 period unveils a substantial -0.08 VECM coefficient for Bitcoin, signaling a shock returning to balance in around 12.5 weeks. Furthermore, the FED Policy Rate exhibits a noteworthy -0.13 VECM coefficient, indicating shock stabilization after about 7.7 weeks. These findings suggest a growing acceptance of Bitcoin and cryptocurrencies as conventional investment tools, propelled by the circumstances of the COVID-19 period.