The last 10 years have seen global geopolitical tensions increase, impacting financial markets, including Bitcoin. Still, the first cryptocurrency may be proving itself as a hedge against conflict.
The Israel-Gaza War appears set to continue after Israeli Prime Minister Benjamin Netanyahu removed political rival and war critic Yoav Gallant from his role as defense minister. The ceasefire with Hezbollah has also relieved pressure on Israeli military operations in Gaza.
In Ukraine, North Korean troops and military hardware have been deployed, and Russia has launched a ballistic missile capable of delivering multiple nuclear warheads to distant targets for the first time.
Furthermore, the victory of United States President-elect Donald Trump may reduce Ukraine’s access to US arms and vehicles, forcing Europe into a more active role.
Both conflicts are slowly but steadily escalating regional and global tensions where dramatic outcomes seem just around the corner. Markets tend to suffer significant sell-offs as risk aversion rises; does this include Bitcoin (BTC)?
‘Bitcoin thrives in conflict’
Bitcoin’s price is particularly sensitive to market sentiment. The escalation of conflict globally has an immediate and generally negative effect, as evidenced when Iran launched an unprecedented direct attack on Israel in April 2024.
The strike, which was a retaliatory measure against Israeli bombings of the Iranian embassy in Damascus, sent the price of BTC plummeting 8.4% on April 13.
Bitcoin price on April 13. Source: TradingView
While the BTC price may falter during periods of geopolitical tension, historical data from various conflicts tells a different story, depending on the time frame.
Top 20 geopolitical risk events and Bitcoin performance. Source: ETC Group
A study by Andre Dragosch, head of research at Bitwise’s ETP platform ETC Group, found that Bitcoin often experiences a short-term price drop when geopolitical risks or conflicts arise. Still, within 50 days, its price typically recovers and surpasses pre-event levels, highlighting Bitcoin’s resilience to such events.
Dragosch told Cointelegraph that although “Bitcoin’s volatility has been in a structural downtrend since its inception,” it remains relatively high compared with traditional asset classes like equities. For that reason, Bitcoin is generally still regarded as a risky asset.
“During times of heightened uncertainty, e.g., due to increased geopolitical risks, risky assets usually tend to be sold for safer or less volatile assets like gold or US Treasurys,” said Dragosch. He said this is one of the reasons Bitcoin tends to suffer from geopolitical risk events in the short term.
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Dubai-based Mithil Thakore, co-founder and CEO of Bitcoin L2 liquidity protocol Velar, told Cointelegraph that in the first stages of a global conflict, “things such as cryptocurrencies are seen as exotic assets that are of little interest when there are more important matters to focus on such as lives, food, supply lines, logistics, and preventing regional fighting turning into global war.”
“In the short-term, if full-scale war kicks off in the Middle East overnight, every crypto asset, including Bitcoin, will be in the red.”
Thakore said that once the initial shock wears off, Bitcoin will probably rally in a matter of days. “Anyone who resists the urge to panic sell within the first 48 hours of a major global conflict will be rewarded for their conviction.”
He added: “Over the longer term, geopolitical conflicts raise the prospects of higher inflation rates globally due to factors like increased fiscal spending, looser monetary policy, supply-chain disruptions, and commodity price spikes, which should all benefit Bitcoin.”
Dragosch’s theory aligns with the research of macroeconomist and financial analyst Lyn Alden, who proposed a theory suggesting that Bitcoin is a global liquidity barometer.
Bitcoin’s price tends to track changes in global liquidity. Source: Lyn Alden
The theory suggests that Bitcoin’s price movements are heavily influenced by global liquidity conditions rather than solely by internal factors like adoption or technological developments.
“Scarce assets generally tend to profit from an increase in inflation induced by expansionary monetary policy as ‘more money is chasing fewer goods,'” said Dragosch.
Thakore agreed, saying, “There is strong evidence that Bitcoin thrives under conditions of abundant liquidity.” He added that Bitcoin’s success during periods of aggressive monetary expansion may not stem solely from increased liquidity but also “as a haven for those who see the folly in major fiat currency debasement.”
Thakore concluded, “While we will hopefully never see an all-out war that would test this thesis, there is actually a case for saying that Bitcoin thrives in conflict.”
That said, Bitcoin’s resilience has its limits. In some instances, it fails to withstand shifts on the geopolitical chessboard, proving it’s not invincible.
Bitcoin’s vulnerability
Geopolitical tensions vary in scope and impact, with each presenting unique challenges. While Bitcoin often thrives during periods of geopolitical unrest, researchers behind the March 2024 study, “Crypto Market Relationships with BRIC Countries’ Uncertainty,” offered a more cautious perspective. They warned that Bitcoin’s resilience may falter in the event of a full-scale war.
José Almeida, lecturer at Lisbon School of Economics and Management (ISEG) and research member from CSG/ADVANCE Research Centre, told Cointelegraph, “There are different investor behaviors depending on whether the event is global, such as the COVID-19 pandemic, or more localized, like the Russian invasion of Ukraine.”
“Localized geopolitical risks, such as the Russian invasion of Ukraine, tend to ‘encourage’ crypto investment.”
In such cases, investors may view cryptocurrencies as a tool to move assets out of the affected regions, avoid sanctions or preserve the value of their savings during regional currency depreciation, said Almeida.
“Bitcoin and certain altcoins act as a hedge against the specific risks posed by geopolitical tensions, providing an alternative for those seeking to protect their wealth from regional disruptions.”
The study’s data set found a pattern suggesting that when economic conditions are stable, cryptocurrencies become more attractive amid localized geopolitical events, said Almeida.
On the other hand, global crises like COVID-19 led to widespread uncertainty, discouraging investment in riskier assets like cryptocurrencies.
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Cristina Gaio, senior associate professor and researcher at IESG, told Cointelegraph, “The pandemic created pervasive uncertainty across all markets, leading many investors to see cryptocurrencies as too volatile, prompting them to hold cash or seek safer traditional assets.”
If a localized military conflict were to extend to global proportions, uncertainty would reign, and Bitcoin may not perform well due to the extended fear among investors.
Tiago Cruz Gonçalves, associate professor at IESG, told Cointelegraph, “This suggests that during localized conflicts, such as the Israel-Iran or Ukraine-Russia situations, we may see crypto investments rise as a hedge against regional instability, whereas in global, widespread crises, crypto may be seen as too risky.”
