Tucker Saland, Princeton University
The Russo-Ukrainian war had an asymmetric effect on cryptocurrency prices, with some cryptocurrencies appreciating and functioning as hedges against geopolitical risk, even as the rest of the market experienced a downturn. In the aftermath of the war, exchange-level data indicates that individuals in Russia and Ukraine purchased increased amounts of Tether, a stablecoin pegged to the US dollar. This paper has two objectives: (1) examine whether there exists a geopolitical risk premium in the cross-section of cryptocurrency returns using a rolling regression of excess weekly returns on the geopolitical risk index by Caldara, Iacoviello (2018) and control factors, and (2) understand the role of stablecoins during times of geopolitical turmoil. Exposure to geopolitical risk is not constant over time, and investors are willing to pay a premium for assets with predictable returns in response to geopolitical shocks. In addition, there is evidence that stablecoins are used as stores of value during geopolitical events and were potentially used as mediums of exchange in Russia to bypass economic sanctions. This research contributes to the growing body of cryptocurrency asset pricing literature. It underscores the need for regulators to carefully consider cryptocurrencies when making policy decisions, given their potential for misuse.
Read the full paper here.