Introduction

Crypto's Impact on the Financial Market: A Model of Price Formation

Introduction

Cryptocurrencies have emerged as a transformative force in the financial landscape, challenging traditional notions of currency and value. In this article, we present a model that endogenously incorporates the interactions between the financial market and cryptocurrencies to better understand their price formation.

Endogenizing the Financial Market and Cryptocurrencies

Our model captures the dynamic interplay between cryptocurrencies and the broader financial market. It considers the influence of traditional financial institutions, such as central banks and governments, on the valuation of crypto assets. By endogenizing these interactions, we can better assess the impact of market fluctuations, regulatory policies, and monetary interventions on cryptocurrency prices.

Central Bank Digital Currency and Its Impact

The creation of central bank digital currencies (CBDCs) by the Bank of England and HM Treasury has further complicated the landscape. While CBDCs are not cryptocurrencies, they share certain characteristics, such as digitalization and the potential for decentralized issuance. Our model examines the potential implications of CBDCs on the stability of the financial system and the dynamics of cryptocurrency markets.

Conclusion

Our model provides a comprehensive framework for understanding the complex relationship between cryptocurrencies and the financial market. It highlights the importance of considering the endogeneity of these interactions to accurately assess the price formation of crypto assets. As the crypto ecosystem continues to evolve, our model can serve as a valuable tool for policymakers, investors, and researchers seeking to navigate the emerging challenges and opportunities in this rapidly evolving field.