In the face of economic uncertainty and the threat that comes along with endless money printing, investors have turned to Bitcoin and other cryptocurrencies in order to diversify their portfolios. In fact, investors’ decisions are greatly swayed by macroeconomic factors such as global economic activity [GEA] and economic policy uncertainty [EPU].
It is no denying that political unrest is afoot across the globe, in some countries more than others. However, what most forget is that factors such as politics, government, and finance are all interconnected, and the financial industry can be at the receiving end of the political upheaval in a country. But, do investors consider political risk while changing their portfolios?
According to a recent study, changes in the political uncertainty index are related to the return and volatility of cryptocurrencies. The findings from the research titled, ‘US Partisan Conflict and Cryptocurrency Market,’ stated that cryptocurrency could be used as a hedge asset against potential political and economic uncertainties.
This paper used the partisan conflict index [PCI], a metric that essentially examines whether political uncertainty could affect the return and volatility of the cryptocurrency. Here, the index was used to measure the tensions between the two main political parties in the United States, the Democratic Party and the Republican Party, and its effects on the crypto-market. It was found that when investors identify rising political turmoil, they change their investment portfolio and diversify accordingly to avoid potential wealth loss.
“The increase in the tensions would make the political situation more volatile and may potentially make people lose trust in the government.”
According to the paper’s empirical results, it was found that the change rate of the PCI is positively associated with crypto-returns and negatively associated with changes in crypto-volatility, especially for Bitcoin, meaning Bitcoin’s return would increase if the U.S. partisan conflict index rises while an increase in the same would reduce Bitcoin volatility.
Bitcoin wasn’t the only cryptocurrency studied here, however. According to the report,
“….the effects of the change in PCI on the Litecoin, Ripple, and Ethereum returns have the same sign but weaker than that on the Bitcoin return when controlling for the Chinese economic policy uncertainty effect.”
With respect to the volatility of other major cryptos, the paper noted that “we find that the effect of PCI on the volatility of other major cryptocurrencies is much weaker than that on the Bitcoin volatility.”
It should be noted, however, that the paper in question incorrectly uses Ripple and XRP interchangeably, another example of how mainstream research can often be ham-handed.