The US-China trade war, Brexit, US presidential election – political developments influence financial markets and have become a major concern for investors. This led to a growing body of empirical literature on the analysis of political uncertainty. While traditional financial markets are fairly well explored, the empirical literature on the effects of government-induced uncertainty on Bitcoin is small. In his recent study “Bitcoin and Global Political Uncertainty: Evidence from the U.S. Election Cycle”, Tobias Burggraf aims to fill this gap by introducing the U.S. federal elections as a proxy for political uncertainty. The U.S. election cycle is better suited to capture political uncertainty than traditional measures for two main reasons:
- A major obstacle in assessing the impact of political uncertainty is the difficulty of isolating exogenous uncertainty, such as macroeconomic uncertainty, from government-related uncertainty. Elections can result in major political shifts and therefore provide the most direct measure of political uncertainty.
- The dates of elections are determined sufficiently far in advance, so that they are publicly known on the dates used for analysis.
Elections proxy for political uncertainty.
Bitcoin closing prices for the period April 28, 2013 to October 31, 2019 are sourced from coinmarketcap (https://coinmarketcap.com/), resulting in a total of 2,378 daily observations. U.S. election data for the same period are collected from the Federal Election Commission (FEC) including election dates, results for Congressional races, and election results for the office of the President. This information is used to approximate global political uncertainty within a period of six, three, or one month prior to a federal election.
Bitcoin may not mitigate the effects of the next crisis.
The findings contribute to the debate whether Bitcoin can serve as a safe haven during times of political uncertainty. During such periods, investors tend to sell their risky assets and reallocate their holdings towards safer ones, such as cash, government bonds, or gold. The rationale is low or negative correlation with other assets, thereby providing a hedge against uncertainty. However, and unlike previous studies, results suggest that Bitcoin returns fall with growing political uncertainty. Therefore, in addition to more difficult price discovery, higher volatility, transaction costs, and lower liquidity, the results add another dimension to the debate of Bitcoin’s safe haven properties by showing that it is not immune against market downturns at times of political uncertainty.
Empirical results do not provide evidence that Bitcoin can serve as a safe haven, and, therefore, should rather be considered what it is – an investment that provides high reward at the cost of high risk.
Please refer to the original paper for further details: