“Digital Gold” and geopolitics

Abstract There is a growing empirical literature on Bitcoin and gold safe haven properties with respect to financial risks and macroeconomic news but very scarce literature regarding geopolitical risks. This paper provides a fresh insight into the Bitcoin safe haven status, in comparison to gold. We, first, propose a geopolitical risk composite indicator based on various sources of geopolitical risks. A Principal Component Analysis is conducted to group the information on these indicators. Second, a dynamic Markov-switching copula model (which accommodates a dynamic link between the developed geopolitical risk index and Bitcoin and gold price dynamics within low and high risk regimes) is used. We show that both Bitcoin and gold respond positively to the composite geopolitical risk indicator when risk is high. This underscores that both Bitcoin and gold have the ability to act as safe havens for assets whose valuations plummet during times of violent geopolitical conflicts. But such properties seem to be conditional upon different categories of geopolitical risks.