A collaboration involving scholars from Bangor Business School in Wales, Poznań University of Economics and Business, Nicolaus Copernicus University in Poland, and Montpellier University in France explored the relationship between cryptocurrency prices and various economic indicators such as stock market movements and oil volatility. The study also examined the impact of major global disruptions, including the COVID-19 pandemic and the conflict in Ukraine, on cryptocurrency markets.
Dr Danial Hemmings of Bangor Business School detailed that the research employed a comprehensive range of indices that mirror various risk dimensions, encompassing geopolitical and economic uncertainties and crude oil and gold volatility. The study’s objective was to assess how these risks affect the pricing of cryptocurrencies compared to the broader economy.
Dr Hemmings highlighted, “One of the key advantages touted for cryptocurrencies is their potential to serve as risk hedges. Our findings indicate that while the prices of cryptocurrencies are generally not tied to economic risks, their vulnerability to these risks tends to increase during periods of significant turmoil, such as during the COVID-19 crisis or the Ukraine conflict.”
This study illuminates the complex relationship between cryptocurrencies and economic stability, suggesting that while cryptocurrencies can sometimes act as practical hedging tools under normal conditions, their ability to mitigate specific risks diminishes during economic uncertainty.
Dr Hemmings underscored, “The nuanced performance of cryptocurrencies as hedging tools should significantly influence investor diversification strategies and contribute to the ongoing discussions regarding cryptocurrency regulation. Policymakers and investors must be cognizant that the hedging capabilities of cryptocurrencies against specific risk factors may not be as robust during periods of economic instability, as was evident during the COVID-19 pandemic and the Ukrainian conflict.”
More information: Barbara Będowska-Sójka et al, Uncertainty and cryptocurrency returns: A lesson from turbulent times, International Review of Financial Analysis. DOI: 10.1007/s00394-023-03123-x
Journal information: International Review of Financial Analysis Provided by Bangor University