Buy when there’s blood in the streets? Bitcoin & geopolitical risk events
Disclaimer: This is not financial advice and does not constitute a solicitation to buy or sell any financial instrument and/or virtual currency such as Bitcoin. You should always do your own research and consult a professional financial advisor before investing. The views herein represent the private views of the author only and not necessarily of his employer.
Anyone who has been actively following the markets, knows that Bitcoin has been severly impacted by the recent escalation of tensions between Russia and the Ukraine. Bitcoin has lost approximately -15% since tensions started escalating in mid-February.
The question is of course: What’s next?
What can history tell us?
To identify significant geopolitical events, I have used the data from Caldara & Iacviello (2021), who calculated a daily Geopolitical Risk Index (GPR) since 1985 (source: https://www.policyuncertainty.com/gpr.html).
Caldara & Iacviello (2021) use historical reportings in major newspapers related to geopolitical events such as threats of war, the start of war or acts of terrorism. They basically employ a text mining algorithm in order to aggregate news flow with particular focus on geopolitical risks.
I have been using this Geopolitical Risk Index for daily performance event analysis for Bitcoin since 18/07/2010.
In the analysis, I have focused on the top 20 geopolitical events that led to the largest increase in the Geopolitical Risk Index within a day or which generated the largest increase in reporting, respectively. Hence, I have filtered out only the most signficant geopolitical events based on this index. Here is the ranking of top 20 most significant geopolitical events since July 2010:
The analysis shows that significant geopolitical shocks do have a short-term impact on the price of Bitcoin. However, the longer the holding period after the event, the more likey it is to achieve positive returns.
On average, Bitcoin was up 162% after one year (365 days) after a significant geopolitical risk event. In 7 out of 10 cases or 70%, the performance has been positive after one year.
From a statistical point of view, this is rather not surprising since Bitcoin is generally an upward-trending asset but so-called excess performance (i.e. post-event performance minus average performance for the same period) shows a similar result.
The fact that the reaction of Bitcoin to comparable geopolitial shocks is quite different implies that these shocks always have to be analysed in the broader macro context. On the one hand, Bitcoin has shown one of the best performances after one the most significant geopolitical shocks in January 2020. This happened before the pandemic hit in March 2020 which was followed by one of the most extreme fiscal and monetary stimuli that led to a massive increase in monetary inflation from which Bitcoin benefited massively.
On the other hand, the Russian air strikes in Syria in November 2017, were followed by a period of subpar Bitcoin performance. Bitcoiners know that this was at the eve of the peak of the Bitcoin retail mania that lasted until December 2017 which was followed by a severe bear market. The broader macro context at that time was characterised by an increase in uncertainty and volatility due to peak growth in early 2018 and a subsequent tightening in monetary policy by the Fed by late 2018.
Likewise, the current developments around the Ukraine-Russia conflict have to be viewed in the broader macro context. Geopolitical events mainly serve as an accelerant of an already ongoing trend. Inflation is already high and the Fed has already commenced its tightening cycle. The increase in geopolitical tensions will likely reinforce this trend due to higher energy prices and thus even higher rates of inflation that the Fed will have to counter eventually. The ongoing tightening in financial conditions will likely weigh on Bitcoin for a while as this is empirically not a good environment for Bitcoin to shine.
Bottom Line
On average, Bitcoin was up 162% after one year (365 days) after a significant geopolitical risk event. In 7 out of 10 cases or 70%, the performance has been positive after one year.
However, geopolitical events have to be viewed in the broader macro context as they usually serve as an accelerant of an already ongoing trend.
Inflation is already high and the Fed has already commenced its tightening cycle. The increase in geopolitical tensions will likely reinforce this trend due to higher energy prices and thus even higher rates of inflation that the Fed will have to counter eventually.
The ongoing tightening in financial conditions will likely weigh on Bitcoin for a while as this is empirically not a good environment for Bitcoin to shine.
Thanks for reading!
Stay humble and stack Sats
AD
About the author of the Avantgarde Digital Research Blog:
André Dragosch has been working for almost 10 years in the German financial industry, mostly in Portfoliomanagement and Investment Research. He is currently working as a cross asset analyst and investment strategist at one of the largest German asset managers in Frankfurt where he is also responsible for digital asset research and in particular Bitcoin. He is currently doing a PhD as well in financial history at the University of Southampton, UK, where amongst others Prof. Richard Werner has supervised his work. He is been a private crypto investor since 2014. He is a married father who loves playing drums, running and travelling.
