Hedging or Hurting? Geopolitical Risk and the Asymmetric, Regime-Dependent Behaviour of Cryptocurrency Returns

Abstract

This study examines the influence of geopolitical risk (GPR) on cryptocurrency returns using daily global and monthly country-specific data from January 2019 to December 2025. Employing fixed effects panel regression, feasible generalised least squares, heteroskedasticity-based IV estimation, and panel quantile regression across eight major non-stablecoin cryptocurrencies, we find that GPR effects are asymmetric and regime-dependent GPR is associated with higher returns in bearish market conditions, remains insignificant under normal conditions, and dampens returns in bullish periods. GPR threats exert a consistently stronger negative effect than GPR acts across all market conditions, reflecting the forward-looking nature of investor behaviour in cryptocurrency markets. Country-specific analysis across 44 countries reveals a clear geographic divide: developed European economies including Sweden, Spain, and Finland show significant negative effects consistent with risk-off behaviour, while emerging and high crypto-adoption markets including South Korea, Saudi Arabia, and Vietnam show positive effects consistent with flight-to-crypto behaviour. Argentina shows a notable reversal between historical and recent GPR measures, reflecting its dramatic macroeconomic deterioration during the study period. Quantile-based Granger causality tests confirm that GPR has predictive power over future returns, particularly during bullish market conditions. These findings challenge the unconditional safe-haven characterisation of cryptocurrencies and carry direct implications for portfolio managers, regulators, and investors seeking safe-haven assets in an increasingly uncertain geopolitical environment.