VIETNAM NATIONAL UNIVERSITY, HA NOI UNIVERSITY OF ECONOMIC & BUSINESS GRADUATE DISSERTATION THE EFFECTS OF GEOPOLITICAL RISKS AND ECONOMIC POLICY UNCERTAINTY ON CRYPTOCURRENCIES Instructor: Ms. Pham The Thanh Student: Tran Thao Linh Student ID: 20050474 Hanoi — 10/2023 ACKNOWLEDGEMENT The process of undertaking and completing a graduation thesis signifies a pivotal and transformative juncture in the life of every student. Such a scholarly endeavor is of paramount importance, serving as the foundation upon which we acquire essential research skills and the knowledge that will be of immense value as we venture into our future careers. I wish to extend my heartfelt gratitude to the esteemed Board of Directors, dedicated faculty, and supportive lecturers at the University of Economics - Hanoi National University, especially within the Faculty of Finance and Banking.
Their unwavering commitment to imparting knowledge and nurturing students has been instrumental in shaping my academic journey. The invaluable insights and expertise that I have gained from their tutelage within the lecture halls have undoubtedly laid a robust groundwork, allowing me to navigate the intricate terrain of thesis completion. In this context, I would like to express my deep appreciation to Master Pham The Thanh, whose direct mentorship and provision of essential documents and scholarly resources have been pivotal in guiding me throughout the process of this thesis. His guidance and support have proven invaluable in achieving the successful completion of this academic pursuit.
However, I am well aware that, given my limited knowledge and experience, this thesis may bear some imperfections and shortcomings. I welcome, with great anticipation, any comments, criticisms, and constructive feedback that will be offered by my peers, mentors, and members of the academic community. These insights, I believe, will not only serve as a testament to the collaborative nature of scholarly pursuits but also as a valuable foundation upon which I can continually enhance my abilities and knowledge in the future. I extend my sincere thanks to everyone who has contributed to my academic journey, and I am eager to embark on this path of continuous improvement and growth.
Lecturer's Confirmation Student's confirmation Tran Thao Linh TABLE OF CONTENTS ACKNOWLEDGEMEENT,. - G- G1 HT TH HH nu HT TH nh 2 IBRS9)0. 5 LIST OF FIGURES 17.- Án HT TH nh TH TH HT Hi nh 7 1. Research objectives and taskS .- - ó- «+ 4 TH TH TH nước 11 2.
Research QU€SfIOTI.-- -- G11 TH HH HH re 11 4. Research subjects and SCOD€S .11 TT nh ng nH 11 4. 12 CHAPTER 1: OVERVIEW OF RESEARCH SITUATION, THEORETICAL AND 9. Overview of the research SIUAfIOII.- - 5 + 119v 9 ng ng nước 13 1.
2Q nh HT TH nh TH HH HH hệt 13 1. The impact of geopolitical risks, economic policy uncertainty on CLYPLOCUITENCIECS. The impact of geopolitical risks on financial aSSefS. The impact of economic policy uncertainty on financial assetfs.
Summary and Knowledge Gap. Theoretical and practical basis. The concept of CryptOCurrencies. The concept of geopolitical risk.
The concept of economic policy Uncertainty .-- 5 5+ +<+++s£+s++ces++ 22 CHAPTER 1 SUMMARYYY.- Gv HH TH TH nh HH Hết 24 CHAPTER 2: DESIGN AND RESEARCH MODEL,. Data AeScription nh ốc. The specification of the var MOdel]. Unit root tests SỪỪỪỪỔỮÚỒẶ.
Series Correlation fSfS.-- LH TH HH HH HH HH 29 2. Inverse Roots of AR Characteristic Polynomial. 31 CHAPTER 3: EMPIRICAL RESULTS & DISCUSSION. Unit root tests for Bitcoin’s T€ẨUTT.
- Gv HH ng ni, 32 3. Unit root tests for GEPÙ_ €urr€n(. Unit root tests for CIP. TH TH TH ng ngà 34 3.
Experimental Results and VAR Model Discussion. Lag length selection. Var model F€SUÏfS,.-- s6 s1 19119119101 931 1 v0 TH HT HT Hết 37 3. Series Correlation fSÉS.
TH TH gu ng TH ng ngà 38 3.- HH HH HH Hà 39 E021 roi an. Gà 45 CHAPTER 4: POLICY IMPLICATIONS. ng HH ri, 46 4. Implications for inVeStors.
Implications for government OrØaTI1ZAfIOTIS.-- 5 c +< + +*kESeseeeeereereeers 46 CONCLUSION an. 49 LIST OF TABLES Table 1: Unit root tests for Bitcoin’s r€fUTT. SG 2112323111331 xe 32 Table 2: Unit root tests for GEPU_CURRENÏT'. -- - - G EEEEEEEY Y1 E91 x£ecee 33 Table 3: DGEPU_ First-order difference .v crree 34 Table 4: Unit root tests for LOEgPL.
-- G1 199191 9n ng ng 35 Table 5: Lag Length Se€Ï€CfIOI.-- -G c3 0112118311 13 1111111 111 11 1 11 g1 ng ng rệt 36 Table 6: Vector Autoregression EStITNAfS,. -- -- c < + 11 1E 1 ng tr 37 Table 7: VAR Residual Serial Correlation LM Tests .--- 55552 +2<<+++<<<s+2 38 Table 8: Heteroskedasticity Tests. cei eecsecsscssecsecssecsecssecseesaeessesseessesseesaeeseesseeseees 39 LIST OF FIGURES Figure 1: Inverse Roots of AR Characteristic Polynomial Figure 2: Impulse Response Eunction. Rationale The world has been facing various detrimental events such as: wars, terrorism, military, or unanticipated changes that might affect the global economy and certain countries.
An illustration, recent escalations in military tensions between North Korea and the United States as analyzed by Kyung-Ae Park et al (2010), or the expanding trade disputes between the United States and China, as discussed by C. Fred Bergsten (2018), could have substantial indirect impacts on the global business landscape and the investment community. These developments impact the stability of international trade policies, thereby leading to increased volatility in various assets, including Bitcoin. Another case in point is the heightened uncertainty in Turkey, which prompted Moody's Investors Services to downgrade Turkey's credit rating (Davis, 2016).
Moreover, it's evident how numerous corporations and nations are presently delaying their economic decisions due to the unpredictability brought about by the COVID-19 pandemic. Meanwhile, Muhammad Umar et al (2021), conducted an evaluation of the safe haven hypothesis for Bitcoin amid a time span with three Presidential elections in the US, and recently, an ongoing COVID-19 outbreak, which has been declared as a global pandemic. Geopolitical risks and economic policy uncertainty might make investors put more of their attention on virtual currencies because of its independence and there is no government, financial institutions intervention or control. Consequently, an inspection is necessary for investors to examine and evaluate the effect of geopolitical risks and economic policy uncertainty on cryptocurrencies and to optimize their investment portfolio.
Bouri et al. (2017a) suggest that the 2008 global financial crisis increased global uncertainty, eased the emergence of cryptocurrency - Bitcoin and strengthened its popularity as both a financial asset and an alternative currency to conventional economies. Cryptocurrency was born with playrole as a potential market that allows people to directly participate in transactions without the intervention of intermediaries. Specifically in recent years, Cryptocurrencies have emerged as a disruptive force in the global financial landscape.
A cryptocurrency is a digital, encrypted currency. The nature of the cryptocurrency market is decentralized and borderless, by Katarina Frajtova Michalikova (2021), also because of this, it could make the cryptocurrency market have 7 a notably sensitive taste with geopolitical risks and economic policy uncertainty. Hence, if a country has any changes on their politics that lead to adverse events like terrorism, war, tension among states or government’s adjustments in covid-19 epidemic period., all those factors could have a significant impact on the volatility of cryptocurrencies. Cryptocurrencies have witnessed a series of remarkable historical events.
In 2013, Bitcoin experienced a significant price surge, briefly reaching $1,000 before rapidly plummeting to around $300. This decline was triggered by the People's Bank of China issuing a ban on interbank transactions involving the Bitcoin virtual currency (BBC News). Nevertheless, Bitcoin's price quickly rebounded and surpassed $1,000 once again. In 2017, as reported by Forbes Journal, the cryptocurrency market saw a substantial influx of funds, with the total market capitalization of all cryptocurrencies surging from $11 billion to over $300 billion.
Bitcoin itself reached a historic high of $20,000 by the end of the year, signaling growing investor interest in cryptocurrencies. However, similar to its previous peak at $1,000, the triumph of reaching $20,000 was short-lived, as Bitcoin subsequently experienced a sharp drop, losing more than 60% of its value within a few months. Halen Partz (2022) delved into the history of Bitcoin crashes and bear markets spanning from 2009 to 2022. The research revealed a significant bullish trend, with Bitcoin reaching a yearly peak of $68,000, marking it as one of the most prosperous years for Bitcoin.
Nonetheless, the mini bear market of 2021 raised concerns about Bitcoin mining's environmental, social, and corporate governance issues. Notably, Elon Musk's electric car company, Tesla, announced the suspension of Bitcoin as a payment method in May 2021, resulting in a substantial decline in Bitcoin's price. Consequently, Bitcoin experienced a rapid descent and entered a bear market in late 2021. This downturn reached its peak in 2022, further exacerbating the ongoing bear market.
The collapse of Terra had a cascading effect on the entire cryptocurrency market, fueled by massive liquidations and a climate of uncertainty, ultimately pushing cryptocurrency lending to plunge below the $20,000 threshold. Numerous coins have been created such as Ethereum, Litecoin, Ripple. Nevertheless, Bitcoin is the most valuable, wellknown coin and primary coin that has drawn the interest of policy makers, financial institutions, commercial enterprises, media, scholars across diverse disciplines or even individual investors all over the world. As reported by CNBC, both El Salvador and the Central African Republic are among the countries that 8 officially recognize Bitcoin as a legitimate digital currency.
A striking example of the Cyprus financial crisis between 2012 and 2013, describing an adverse event that reflected the collapse of the Cyprus economy. Cypriot banks showed over-reliance on local real estate companies by using excessive leverage, and the knock-on effect of the Greek government debt crisis, or even international credit rating agencies downgraded the credit status of Cyprus government bonds. That led to Cyprus having to declare a vital decision in which a bailout was accepted and it required imposing a one-time levy on bank deposits. However, this has sparked controversy that making traditional deposit accounts seem to be less secure.
Consequently, fears of security, bank closures, capital controls, investors seemed to want to seek alternative assets. Luther et al (2017), investigated the number of downloads of bitcoin apps increased following the bailout announcement, which demonstrated there is interest in Bitcoin, Bitcoin could be regarded as one of the initial priority digital currencies that investors had preferred to hold at that time. Bitcoin, with its promise of financial autonomy and resistance to government interference, became a refuge for many. Therefore, the price of Bitcoin skyrocketed, highlighting the immediate response of the cryptocurrency market to geopolitical uncertainties On the other side of cryptocurrency market, Jamal Bouoiyour et al (2017), inspected that there was a series of important economic policy uncertainty events and their consequences in 2016, which might be first mentioned during a bull state of the market, a sequence of event coming one after the other those are the use of Bitcoin in trade, the yuan deterioration, the uncertainty surrounding Brexit and India’s demonetization were considered as the most potential contributors of Bitcoin price.
Furthermore, an intense anxiety over Donald Trump being the president of the United States was shown to be a positive determinant pushing up the price of Bitcoin when the market is functioning around the normal mode. Last but not least, the velocity of bitcoins in circulation, the gold price, the Venezuelan currency demonetization and the hash rate were found to be the fundamentals influencing the Bitcoin price when the market is heading into decline. In conclusion, because the fears over the continued deterioration of yuan against U. dollar have pushed Chinese traders and investors to place their bets and investments in Bitcoin.
Moreover, the anxieties over the Brexit and 2016 U. presidential elections outcomes have encouraged investors to seek a secure alternative. Since the more demand, the less supply that made a great contribution to the increase of Bitcoin’s price. Therefore a question is concerned - what impacts the volatility of the cryptocurrency market?