Bitcoin is not only a hedge against geopolitical risk (GPR), but bitcoin’s price (BCP) can also predict it according to a new paper.
“GPR can be positively affected by BCP, which suggests that the Bitcoin market is a leading indicator, when it comes to reflecting and providing contingency for the financial risks associated with the global geopolitical events,” they say.
This is the first time such claim has been made and it is the first time a study finds bitcoin’s price is a leading indicator for anything, let alone geopolitical risk.
“By analyzing the time-varying interrelationship between GPR and BCP, we can also conclude that the Bitcoin can be considered as an asset to avoid GPR during several time periods, but this is not always going to be the case.
On one hand, the GPR can affect BCP during certain time periods. Due to this, investors can predict the BCP more accurately in accordance with the GPR, and also determine the level of investment to be made in the Bitcoin market.
Also, potential investors can consider the Bitcoin as an asset in their portfolio, in order to diversify their risks, reduce their losses and maintain their returns. The government can also adapt its policies according to the trend which the BCP is following, based on GPR.
This is necessary in order to implement relevant policies that will eventually aid in preventing the Bitcoin bubbles, as well as any dips and downward plunges in BCP, which may reduce the public’s confidence. This way, the relevant authorities can promote a healthy development of the Bitcoin market.
On the other hand, the increase in the BCP may lead the GPR to rise during certain time periods, indicating that the Bitcoin market is an effective tool, which should be taken into account by governments when discussing the global geopolitical environments.
If these measures come into effect, the related departments can take measures in advance, in order to reduce the potential costs that may be incurred after, or even during, the geopolitical events.”
The study engages in technical analysis of data from July 2010 to December 2019 with their summary being as follows:
“The Syrian war and Cyprus crisis in 2013 not only caused the GPR to increase, but also lead and encouraged investors to be more willing to hold on to their digital currencies.
Then, the rise in demand drove the BCP higher, which indicated that the Bitcoin could be viewed as an asset to avoid GPR. Since the year 2014, although there have been several global geopolitical events (e.g., The Russian invasion of Crimea, the escalations from ISIS and the resulting conflicts between Ukraine and Russia, and the terrorist attacks in Paris) that happened around the world, the BCP has remained at a low level. Hence, it shows that the Bitcoin failed to hedge the risks of the global geopolitical events during this period of time.
At another instance, the tensions in North Korea, in the year 2017, caused the GPR to soar higher, which also lead the demand for the Bitcoin, and as a result, the BCP to increase.
In addition to this, the large-scale injection of investment into Bitcoin currency (especially by China, Japan and South Korea) skyrocketed the BCP by about 2000% in the year 2017. However, this dramatic growth trend did not continue for long and there was a sharp decrease in the BCP in the year 2018, which was partly caused by the increase in the value of the U.S. dollar.
Moreover, the global GPR remained at a high level due to the Syrian tensions and the attacks of the Saudi Arabian allied forces on Hodeida, and as a result the Bitcoin was not considered to be the winner after the gunshot during this period.
In the year 2019, the deterioration in the Middle East, and the global trade wars lead to an increase in the GPR. After this the investors were inclined towards storing those assets which possessed the hedging ability, logically causing the demand for the Bitcoin and the BCP to soar.
Also, the decrease in the GPR reduced the demand of the Bitcoin currency, and as a result the BCP, which indicated that the Bitcoin could be viewed as an asset to avoid GPR in 2019.”
The picture therefore is somewhat mixed presumably because after a fast price rise to what at the time appears like dizzying highs, other factors like bear sentiment overwhelm GPR’s effects.
But the authors conclude that bitcoin should be included in investment portfolios “in order to diversify their risks, reduce their losses and maintain their returns,” and they say:
“The increasing trend of cryptocurrency represents a new phase of technology-driven markets. The governments should support the development of encryption technology, and strengthen market supervision.
Governments must also promulgate relevant laws and regulations, in order to ensure the regular and orderly development of the cryptocurrency market.
The related industries also need to develop secure and reliable network security technologies and protocols.
Furthermore, further technological breakthroughs must be achieved, in order to increase the popularity of cryptocurrency applications, which will especially aid in making overseas payments easier and more complete.
If these suggestions are effectively implemented, we can expect that cryptocurrency will penetrate into most aspects of human society, and its market will become a significant leading indicator of the macroeconomic and political situations of any nation.”