New research casts doubt over cryptocurrencies’ ‘safe haven’ properties

New research published in the International Review of Financial Analysis suggests that claims cryptocurrencies are immune to economic risks should be taken with caution.

Research carried out by a team of international academics looked at how connected cryptocurrency prices are to factors such as the stock market and oil volatility, as well as how turbulent periods such as the COVID-19 pandemic and the Ukraine war affected cryptocurrency behaviour.

The research was carried out by academics from Bangor Business School, Wales, Poznań University of Economics and Business, Poland, the Nicolaus Copernicus University, Poland and Montpellier University, France.

Dr Danial Hemmings of Bangor Business School said, “By using various indices covering diverse risk areas, from geopolitics and economic uncertainty to Crude Oil and Gold Volatility indices and using a wide portfolio of cryptocurrencies, we sought to compare the significance and size of various risk transmissions between the pricing of crypto assets and the real economy.

“One of the principal promises of crypto assets has been their ability to hedge risks, and what we found is that while the pricing of cryptocurrencies remains largely disconnected from economic risks, in terms of volatility the ripple effect on cryptocurrencies did intensify during turbulent periods such as the COVID-19 outbreak or the Ukraine war.”

These findings are significant as they emphasise the nuance in the hedge-potential of crypto assets.

“This should have implications for the diversification strategies of investors, as well as inform the debate around the regulation of crypto,” explains Dr Hemmings. “Policymakers and investors should be aware that while crypto investments appear to serve as a good hedging instrument during normal economic conditions, their hedging ability in relation to certain risk factors is distorted or weakened in periods of economic turbulence, as evidenced during the COVID-19 pandemic and the Russian invasion of Ukraine.”

The full paper is available in the International Review of Financial Analysis 94 (2024).