An index that measures geopolitical risk based on newspaper reports predicts bitcoin returns according to a study of studies.
“Overall, fourteen primary studies are under scrutiny in this integrated review,” the author says, looking at the relation between the Geopolitical Risk Index (GPR) and stocks, gold, oil as well as cryptos.
Presenting how geopolitical risk is measured to see its effect on these assets, the study says:
“The calculation of values of this index takes place by counting the number of articles that present a linkage with geopolitical risk in each of these newspapers for each month and then normalizing.
To be more precise, words linked with explicit mentions of geopolitical risk, military-related tensions involving large regions of the world and a U.S. involvement and terms directly connected to nuclear tensions are involved.
Furthermore, words that are tied to war threats and terrorist threats are adopted. Moreover, terms representing press coverage of actual adverse geopolitical events (such as terrorist acts or the initiation of a war) are used.”
All the studies reviewed suggest there’s a relationship between geopolitical risk and bitcoin. For example:
“As concerns findings based on QQ techniques, they show that the geopolitical risk exercises positive and statistically significant impacts at upper quantiles of both the returns and volatility of Bitcoin. It is supported that Bitcoin can act as a hedger against geopolitical risk.
Baur and Lucey (2010) support that financial assets act as hedgers when they exhibit no correlation or negative correlation with alternative assets. Moreover, when they exhibit hedging abilities during extreme economic conditions they are considered to be safe havens.”
On the other hand, “econometric outcomes reveal that the linkage between Bitcoin and the VIX index is not steady over time and over frequencies.” VIX being CBOE’s Volatility Index, a popular measure of the stock market’s expectation of volatility based on S&P 500 index options.
However, when it comes to geopolitics, they say “findings indicate that there is a strong nexus between Bitcoin and the global geopolitical risk. To be more precise, the GPR determines whether Bitcoin acts as a safe haven, as a risky investment or as a normal investment.
When GPR is high, then Bitcoin is strongly linked with gold, US Treasury yields and negatively connected with the EUR/USD exchange rate. Moreover, the appearance of Bitcoin price bubbles is more likely to take place. It is argued that these findings can be extended regarding Ethereum or Ripple.”
Although they say the findings can be extended to eth, that’s only to some extent as “bitcoin is the only cryptocurrency that presents jumps positively dependent on jumps in the level of geopolitical risk.”
The other ones are presumably a bit too young and bitcoin is seen as a category representative with it remaining the primary crypto traded on Wall Street. So in conclusion:
“There is evidence that geopolitical risk displays powerful predictive powers as concerns the returns and volatility of Bitcoin and other major digital currencies in a positive direction.
Moreover, the GPR is found to be a strong determinant of whether Bitcoin acts as a diversifier, hedge or safe haven in portfolios with other assets. Additionally, it is revealed that Bitcoin could act as a hedge against geopolitical uncertainty.”
For gold and other assets, “there is some evidence that stock markets are not influenced by the GPR index while gold receives much larger impacts.
When it comes to findings about the linkage of geopolitical uncertainty with oil prices, it is revealed that the GPR index exerts a negative effect on oil prices and volatility and that the global GPR or composite indices of emerging markets are more representative.”
So interestingly this study of studies seem to suggest bitcoin is more responsive to geopolitical risk, presumably because it is more globally accessible than the other assets by individuals living in the geopolitically affected areas.
That means it can be used as a hedge against GPR, with that potentially being a step towards a safe haven status.