Safe havens in the digital age: Cryptocurrencies and geopolitical risks

Abstract

This study examines the impact of geopolitical risks (GPR) on cryptocurrency volatility, with a focus on green and non-green cryptocurrencies. Geopolitical risks - stemming from conflicts, terrorism, and political tensions - have significant implications for financial markets and investment decisions, as highlighted by recent events such as the Russia-Ukraine war, Israel-Hamas conflict, tensions in the Korean Peninsula, China-Taiwan disputes, and US-UK actions against Houthi forces in the Red Sea. Using a dataset of 10 cryptocurrencies from 2014 to 2023, the analysis employs the GARCH-M-GJR-LEV econometric model to investigate volatility dynamics. The results show a negative correlation between geopolitical risks and cryptocurrency volatility, indicating that as geopolitical tensions increase, cryptocurrency markets tend to stabilize, suggesting their potential as safe havens. Moreover, the findings reveal that green cryptocurrencies are more resilient to geopolitical shocks than non-green ones, highlighting the rising importance of sustainability in financial markets. This research contributes to the literature by offering insights into the differential responses of green and non-green cryptocurrencies to geopolitical events. The findings have practical implications for investors looking for hedging tools during periods of heightened geopolitical uncertainty, as well as for policymakers aiming to understand the broader impacts of geopolitical dynamics on emerging financial markets like cryptocurrencies.