“Digital Gold” and Geopolitics: Bitcoin as a Political Risk Haven
Is bitcoin an emerging “safe haven” asset in an increasingly uncertain world, or just another speculative instrument, a tech-ed up tulip for the digital age?
This question is central to bitcoin’s latest boom, which has coincided with a sell-off in the U.S. dollar and less luster for gold as the Covid-19 pandemic rages, sovereign liabilities balloon, the U.S. experiences its most tumultuous transition of power since the 19th century, and geopolitical risks grow in the Middle East and East Asia. At the same time, risk is clearly on for global investors: equity markets keep soaring while U.S. Treasury yields are climbing, with government stimulus and vaccine optimism driving bets on global reflation.
GeoQuant’s data helps us hazard an answer. In short: while bitcoin appears more like a speculative reflection of geopolitical risks than protection against them, it does get traction as a hedge against (growing) U.S. country risks. Meanwhile, gold continues to hold its ground as a safe haven asset, while the US dollar is losing it.
First, the caveats: bitcoin has only been actively traded since 2017, a short period coinciding with unique political flux in the United States, broader geopolitical uncertainty, a mostly-frothy run for global markets, and now, a global pandemic. A world where the U.S. is home to both growing (geo)political risks and investors’ most popular hedges against them— i.e. the world’s reserve currency, “risk free” sovereign debt, and deepest equity markets—will complicate any analysis of geopolitics and “safe haven” assets, never mind one over a limited time series.
That said, the period’s instability provides an auspicious analytical backdrop, while the fact that GeoQuant generates daily political risk data at both the country and global level—and does so systematically with limited analyst intervention—gives us a good shot at meaningful insight.
To keep things simple, we examined daily relationships between our topline Global and U.S. Political Risk indicators and the U.S. Dollar Index (DXY); Gold in dollar terms (XAU/USD); and Bitcoin in dollar terms (BTC/USD), all from 1 January 2017 to present. U.S. Political Risk is our topline risk score for the U.S. derived from our 22 fundamental political risk factors. Global Political Risk —a proxy for broader geopolitical risks in the international system—is a GDP-weighted average of Political Risk scores for all 75 countries in the GeoQuant system.
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Gold has far and away the strongest positive relationship with both Global and U.S. Political Risk, correlating at 0.72 and 0.94 respectively, day-on-day. Bitcoin correlates at only 0.28 with Global Political Risk but increases to 0.65 versus U.S. Political Risk, while the DXY shows very weak correlations with both (-0.15 and 0.09). In this period, then, gold appears to have gained from higher geopolitical and U.S. country risks; bitcoin more from the latter than the former; and the U.S. dollar neither.
At the same time, although we may expect higher political risks to hurt U.S. equity markets, recent years have shown just the opposite: the benchmark S&P 500 is correlated at a positive 0.35 with Global Political Risk and 0.80 with U.S. Political Risk since 1 January 2017. Again, excepting some ephemeral periods during the U.S.-China trade war, equity markets have basically ignored, if not welcomed, a higher political risk environment.
At least in part, this dynamic is driven by the “everything” rally in contemporary U.S. markets: as political risk has increased, so too has the S&P 500, bonds, gold, bitcoin—and, of course, the Fed’s balance sheet. But it also complicates our story: if higher political risks have brought gains for haven (sans USD) and speculative assets alike, how do we know where bitcoin falls?
Digging a bit deeper, we see two important trends. First, when it comes to global/geopolitical risks, bitcoin looks a lot more like equities than it does like gold—more of a speculative play than a “safe haven”. Indeed, while the relationship between Global Political Risk and the S&P 500 in gold terms is firmly negative at -0.71 (implying that rising geopolitical risk drove S&P 500 values down relative to gold), this is only barely true for the S&P 500 in terms of bitcoin, with the correlation just -0.03. In sum, even when equities actively ignore growing geopolitical risks, gold does not, while bitcoin basically washes out.
By contrast, in the context of U.S. country risk, bitcoin looks more like gold than equities: U.S. Political Risk correlates at -0.53 with the S&P 500 in gold terms and a very similar -0.50 with the S&P 500 in terms of bitcoin. As such, given growing political and social instability in the world’s largest financial and consumer market, bitcoin does look more like “digital gold”, particularly given a persistent decline in the U.S. dollar. In fact, when compared directly, bitcoin is actually more aligned with higher U.S. Political Risk than gold on a daily basis (i.e. risk correlates at 0.41 with bitcoin in gold terms, per the figure below).
This dynamic will be critical to bitcoin’s future, especially as the distribution of crypto investors shifts from East Asia toward North America and the specter of more forceful U.S. intervention in crypto looms larger. Whether U.S. regulation is tilted more toward co-optation (i.e. USD-backed digital currency, à la China) or coercion (i.e. restricting bitcoin mining and transactions — also à la China) remains to be seen, but its arrival is inevitable if bitcoin persists as an alternate store of value for American investors. Thus far, Chinese regulation has actually helped fuel the current bitcoin boom by limiting supply. Yet stronger intervention by the U.S.—still the world’s most powerful sovereign—will push bitcoin a lot further from a “border-less” currency toward a more politicized medium of exchange. And that may ultimately be its undoing, at least for bitcoin’s true believers.
Crypto advocates often debate bitcoin’s raison d’ȇtre as protection against a future doomsday or as the currency of a glorious future. Our data suggests a less millenarian fate—though one more enduring than a tech-ed up tulip.