Journal of Applied Finance & Banking

Cryptocurrency Returns and the Macro-economy: Evaluating the Predictive Role of Inflation and Financial Conditions

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• Abstract

   

  This paper examines how Bitcoin returns interact with macroeconomic and financial drivers—specifically inflation, industrial production, money supply, stock market returns, the wholesale price index, and financial conditions—using monthly data from April 2015 to March 2025. Methodologically, we apply Augmented Dickey-Fuller (ADF) tests, ordinary least squares (OLS) regression, and vector autoregression (VAR) modelling. Because not all variables are stationary at levels, the VAR model is estimated with differencing. The OLS results indicate that traditional macroeconomic factors do not effectively explain Bitcoin returns. However, the VAR analysis reveals that inflation significantly Granger-causes Bitcoin returns, whereas financial conditions and equity markets show negligible predictive power. Impulse response functions confirm that macroeconomic shocks hit Bitcoin only in the short term, and variance decomposition shows that over 84% of Bitcoin’s volatility is driven by its own innovations. We conclude that Bitcoin remains a largely decoupled, self-driven asset with minimal integration into traditional macroeconomic fundamentals, despite a modest predictive link to inflation.

   

  JEL classification numbers: G12, E31, E44.

  Keywords: Cryptocurrency, macroeconomic, VAR model, ADF test.