TL;DR
Background: Geopolitical risks are rising, and the cryptocurrency market has become a high beta risk asset deeply embedded in the global macro cycle.
Quantitative Framework: The GPR index can be divided into "Threats" and "Acts," with negative effects primarily driven by "Threats."
Transmission Mechanism: Risk preference shifts | Inflation and interest rate cut concerns | Market structure amplification.
Causes of High Beta: Increased correlation of risk assets + High leverage forced liquidation waterfall + Endogenous liquidity contraction.
Market Outlook: Benchmark scenario of fluctuation recovery | Pessimistic scenario of secondary bottoming | Optimistic scenario of high volatility and excessive rebound.
Implication: Investors need to incorporate geopolitical risks into a unified macro framework and dynamically assess their impact on risk premiums and liquidity.
I. Overview of Geopolitical Risks
What do Geopolitical Risks mean?
Geopolitical risks are often considered as "the shock of a sudden news event." However, a more accurate understanding is that it is a collection of events and expectations—including war or conflict escalation, terrorist attacks, sanctions and counter-sanctions, diplomatic confrontations, disruptions to key shipping channels, trade frictions, and tariff escalations—that collectively raise future uncertainty.
The key to geopolitical risks lies not in the events themselves, but in the market's re-pricing of probabilities for future paths. In other words, GPR is a "macro-level risk premium manufacturing machine." It may not erupt every day, but as long as it rises, the market will respond with higher discounts, stricter risk preferences, and tighter funding constraints.
How to Quantify Geopolitical Risks?
The Geopolitical Risk Index (GPR Index) is compiled by Federal Reserve economists Dario Caldara and Matteo Iacoviello, who statistics the proportion of negative geopolitical events or threats discussed in international newspapers and magazines since 1900, with data sourced from the top 10 international newspapers.
The geopolitical risk index is an indicator that measures global changes in geopolitical risk and is typically used to assess the potential impact of political instability, conflicts, wars, policy changes, etc., on economies and markets in specific countries or regions. More importantly, this system splits risk into two more "tradeable" parts:
Threats: The stage where risk is brewing but has not yet materialized—threats, warnings, concerns, risks, tensions, etc., are densely occurring. When threats rise, the market often first trades "possibilities" (expectations), manifested as a rise in panic indicators, strengthening of gold/USD, and the emergence of oil price risk premiums;
Acts: The stage where risks have occurred or escalated—fact-based reports increase, such as the start of wars, escalating conflicts, and carrying out terrorist attacks. At this point, the market begins to trade "real shocks" (supply/demand/policies/growth), with volatility often becoming more severe and more likely to trigger cross-asset chain reactions.
According to data from the MacroMicro platform, the global geopolitical risk "Threat" index significantly rose in January 2026, with a reading of 219.09. When GPR rises, the market’s first reaction is often to first reduce risk exposure before discussing whether to bottom buy, which can be reflected as: increased volatility (VIX rising), risk asset retracement, and greater popularity of safe-haven and cash-like assets.
Source: https://www.matteoiacoviello.com/gpr.htm
II. Impact and Transmission of Geopolitical Risks
The rise of geopolitical risks (GPR) does not directly cause fluctuations in the cryptocurrency market; rather, it first elevates macro uncertainty and then transmits through multiple channels, ultimately forming violent synchronous fluctuations in the cryptocurrency market. This is the inevitable result after macro pressures are transmitted and market structure is amplified.
The GPR rise mainly operates through the following four mechanisms:
(1) Risk preference shifts: VIX rises, credit spreads widen, overall reduction in risk assets;
(2) Energy and commodity shocks: Gold and oil prices rise, inflation expectations increase;
(3) Policy and liquidity repricing: Delayed interest rate cut expectations, strong dollar, long-term rates rebound;
(4) Market structure amplification: Thin liquidity on weekends, high-leverage derivatives, forced liquidation waterfalls.
The combined effect of these mechanisms leads to the cryptocurrency market experiencing "more severe" synchronous fluctuations than the stock market.
Risk Preference Shifts
The escalation of geopolitical conflicts first triggers risk-averse sentiment. Market risk aversion rises, and the volatility index VIX increases, with capital flowing out from high-volatility assets and turning towards traditional safe-haven assets.
VIX (CBOE Volatility Index) is the core indicator measuring the expected volatility of US stocks over the next 30 days, derived from the prices of S&P 500 index options, reflecting implied volatility rather than historical actual volatility. As it skyrockets during market downturns, it is referred to as the "fear index." Its numerical range can intuitively reflect market sentiment: below 20 is stable and optimistic; 20-30 is vigilant; above 30 indicates high panic; above 40 indicates extreme panic (often seen in major crises).
By March 2026, VIX had rapidly risen from about 14.50 at the beginning of the year to above 20, reflecting the market's fear of military conflict and disruptions in the energy supply chain. Gold, as a classic safe-haven asset, typically shows strong buying at the onset of geopolitical crises. Research by the World Gold Council shows that for every 100-point increase in the GPR index, gold prices rise by an average of approximately 2.5%. The correlation between spot gold and the GPR index is highly positive, especially during times of sovereign credit risk or worsening situations, where its safe-haven value even surpasses that of traditional currencies.
Inflation and Interest Rate Cut Concerns
Escalation of conflicts in regions like the Middle East often first impacts oil prices and shipping expectations, heightening inflation concerns, and subsequently forcing the market to lower interest rate cut expectations, thereby exerting persistent pressure on overvalued and highly volatile assets.
The core driver of oil price volatility is the risk of supply disruption, rather than mere sentiment. The safety of key routes such as the Strait of Hormuz directly determines the level of "geopolitical premium." If conflicts become prolonged, they will bring persistent inflation pressure. If gold primarily reflects the safe-haven demand in response to uncertainties in the financial system, then oil prices directly map the impact of conflicts on the real economy's supply and inflation. As soon as the market begins to worry about supply chains, sanctions, and counter-sanctions, oil prices will be re-priced.
Brent crude oil has sharply risen recently, with monthly increases exceeding 20%. As geopolitical risks rise, the shocks and volatility in energy prices often appear simultaneously, driving switches in risk preferences and liquidity repricing. Rising oil prices reinforce inflation stickiness concerns, directly undermining interest rate cut certainty. When market expectations shift from "easing is on the way" to "higher rates for longer," cryptocurrency assets, as high volatility, high expectation varieties, often bear the brunt of pressure, especially during liquidity-thin periods.
Since the beginning of 2026, a high positive correlation has existed between oil prices and VIX, with both currently rising together, indicating that soaring energy prices are directly driving market panic. The price of BTC, regarded as "digital gold," shows a clear negative correlation with VIX, meaning the more panic in the market, the greater the selling pressure on Bitcoin. The underlying reason is that the inflation pressure brought by rising oil prices strengthens high-interest rate expectations, which constitutes a dual blow to high-risk assets (Bitcoin) and the stock market (as reflected through VIX).
Characteristics of the Cryptocurrency Market Structure
After macro pressures are transmitted to the cryptocurrency market through the first three routes, the structural issues of the cryptocurrency market will further amplify the shock. The structural characteristics of the cryptocurrency market determine that it often experiences more severe fluctuations than traditional risk assets during risk events:
24/7 round-the-clock trading: This makes weekends the most susceptible times for macro shocks to amplify: traditional markets are closed, hedging tools reduce, and market depth decreases;
High proportion of derivatives and leverage: Price declines can easily trigger margin calls and forced liquidations, creating a "passive selling" waterfall;
Significant liquidity layering: Unequal liquidity layering manifests across different aspects such as large exchanges vs small exchanges, spot vs perpetual, and mainstream coins vs altcoins, with liquidity quickly concentrating at the top during risk preference contractions, causing tail assets to decline more drastically.
It is these driving mechanisms that determine that the "high beta" property of the cryptocurrency market is dictated by mechanisms, rather than driven purely by sentiment.
It is worth noting that when conflicts are compounded by sanctions, capital controls, or banking system restrictions, cryptocurrencies, due to their cross-border transfer and alternative settlement properties, may become a localized hedging tool, providing buying support. At the onset of the Russia-Ukraine war, there was a noticeable increase in fiat currency trading activity and related demand. While this route can provide short-term support, it is often difficult to reverse the downward trend dominated by macro risk preferences unless accompanied by stronger narratives such as long-term inflation or sovereign debt crises.
The following chart illustrates a six-month trend drawn from Yahoo Finance, with the blue shaded area representing the CBOE Volatility Index (VIX) overlaid with the performance of Brent crude oil futures, gold, and Bitcoin during the same period. As 2026 progresses, with the continued escalation of geopolitical risks, the VIX index has risen significantly, closing at 23.75 on March 6, 2026, while Brent crude oil has similarly rebounded strongly; gold, as a safe-haven asset, significantly increased; while Bitcoin faced dramatic retracements. The chart intuitively verifies the dual transmission path of geopolitical risk through "VIX surge + energy price spike," on one hand raising market volatility and inflation expectations, and on the other leading to significant pressure on high beta risk assets like cryptocurrencies.
Source: https://finance.yahoo.com/
III. Reasons for High Beta of Cryptocurrency Assets
Many people simplify BTC as "digital gold," but during the majority of macro phases, it resembles "a high volatility version of the NASDAQ." The reasons stem mainly from three structural layers: the correlation included in risk asset pricing, price discovery predominantly occurring in derivatives, and the "endogenous liquidity cycle" formed by stablecoins and exchange margin.
Correlation with Risk Assets
Research by CME Group points out that since 2020, the correlation between cryptocurrency assets and the NASDAQ 100 has been largely positive, and during certain phases in early 2025 and 2026, the rolling correlation can reach approximately +0.35 to +0.6 (significantly phase-dependent, not constant).
Source: https://www.cmegroup.com/insights/economic-research/
This means that once a macro shock triggers "risk assets to reduce positions together" (war escalation, oil price rise, shift in interest rate cut expectations), BTC finds it hard to stand alone and often falls faster; this is the first layer of "high beta."
High Leverage Amplifies Volatility
The dramatic ups and downs in the cryptocurrency market often do not stem from basic changes over 24 hours but from the acceleration in the "de-leveraging" chain involving funding rates—margin—forced liquidation.
In the 2025 "10.11" crash incident, over $19 billion in leveraged positions were liquidated within 24 hours, setting the record for the largest daily liquidation in cryptocurrency history, while the open interest of perpetual contracts significantly shrank, indicating that "liquidation waterfalls" push already fragile markets toward nonlinear volatility.
Endogenous Liquidity Mechanism
When macro tightening expectations heat up, liquidity in stablecoins becomes more cautious, and borrowing and margin conditions tighten simultaneously, resulting in "self-siphoning" in the market: available margin decreases → passive position reduction → price decline → collateral shrinkage → further passive position reduction.
It can be seen that the cryptocurrency market does not rely primarily on "ease/tighten" from central banks like traditional markets; instead, it resembles a system that automatically shrinks liquidity under pressure, thus making it easier to suffer rapid declines and rebounds.
So, does "digital gold" still hold? The rolling correlation between BTC and gold has historically peaked but has since declined to nearly 0 since 2024. Therefore, a more accurate framework is that under short-term shocks, BTC resembles a high beta risk asset; in the medium to long term, in scenarios involving capital controls, cross-border frictions, and sovereign credit concerns, BTC is more likely to demonstrate its narrative advantages of being "transferable across borders, and non-dilutable."
IV. Subsequent Trend Outlook
The impact of geopolitics on cryptocurrency is essentially not about whether "war will favor Bitcoin," but rather how risk preferences and liquidity conditions change. While the risks in the Middle East remain uncertain, we will explore possible paths and corresponding trends using a three-scenario framework—key triggers—corresponding movements.
Benchmark Scenario: Fluctuation Recovery
Assuming that the conflict remains within a controllable range and that there are no long-term disruptions to key shipping and energy supplies, oil prices fluctuate at high levels but no longer soar; market concerns about inflation ease, VIX gradually recedes, and interest rate cut expectations "slowly recover" after data confirmation.
In such an environment, cryptocurrencies as high beta assets are unlikely to immediately emerge from a unilateral trend, but are more likely to undergo a "range fluctuation + gradual uplift" recovery: supported by the fall of risk premium and low-level configuration, while constrained upwards by macro caution and the time required for leverage recovery.
Pessimistic Scenario: Secondary Bottoming
If the conflict spills over to a broader range, leading to substantive supply disruptions or prolonged increases in shipping costs, oil prices continue to climb, bringing inflation back to the forefront, and markets are forced to further postpone interest rate cuts, even revaluing to a higher actual interest rate path, risk assets face an overall valuation adjustment.
At this time, the triple amplifiers of cryptocurrencies will overlap: dropping along with risk assets + de-leveraging in derivatives + contraction of endogenous liquidity (margin/borrowing conditions tighten simultaneously), making it easier to see a structure of "accelerated decline—weak rebound—re-breaking," known as secondary bottoming.
Optimistic Scenario: High Volatility Excess Rebound
Should risk events cool quickly, oil prices decline, VIX falls, and macro signals become clearer in terms of easing, the market will regain confidence in the interest rate cut path, and risk preferences will recover rapidly.
Cryptocurrency tends to show a stronger elastic excessive rebound during such phases: capital rebounds combined with short cover and leverage reopening may lead prices to exhibit a "sharp surge" trend. However, caution is warranted: the structural characteristics of crypto determine that it often "rises quickly, and retreats quickly," making sharp returns likely during periods of overheated sentiment.
V. Insights and Summary
Cryptocurrency assets have thoroughly integrated into the global macro financial cycle, no longer an "independent narrative asset" divorced from the mainstream, but a high beta risk asset jointly driven by oil prices, inflation expectations, interest rate paths, and volatility.
Three Insights
Insight 1: The true lethality of geopolitical risk lies in the pre-pricing of "threats" to risk premiums.
After breaking down risk into "Threats" and "Acts," the negative effects are primarily driven by the former. This means the market often completes re-pricing through spikes in VIX, oil price premiums, and delayed interest rate cut expectations even before conflicts escalate, manifesting as "expectations become reality."
Insight 2: The high beta characteristics of the cryptocurrency market are an inevitable result of both macro transmission and market structure dual forces.
Risk preference shifts, inflation and interest rate cut concerns, policy liquidity repricing, combined with four mechanisms of 24/7 trading, high-leverage liquidation, and endogenous liquidity contraction mutually reinforce to make cryptocurrency assets fluctuate significantly stronger than traditional markets under similar macro shocks. This is not sentiment-driven but mechanism-driven.
Insight 3: The macro positioning of Bitcoin has become an irreversible structural trend.
Bitcoin and US stocks have transformed into long-term positively correlated assets, indicating that Bitcoin is increasingly being traded as a risk preference asset. In the short term, it resembles "a high volatility version of the NASDAQ"; in the medium to long term, its attributes as "digital gold" will only truly manifest in scenarios of capital controls, sovereign credit crises, or heightened cross-border frictions.
Conclusion
In the current environment of high interest rates + geopolitical conflicts, Bitcoin's attributes as "digital gold" are temporarily dominated by its high beta risk properties. Investors who understand the transmission mechanisms of geopolitical risk will shift from passively enduring volatility to actively seizing opportunities. Only by turning geopolitical uncertainties into quantifiable risk premiums and liquidity signals, and dynamically assessing their impacts on asset allocation, can rational decisions be made amid complex situations. The long-term value of the cryptocurrency market has never been about avoiding macro cycles but about deeply understanding and applying it.
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Risk Warning
The cryptocurrency market is highly volatile, and investment itself carries risks. We strongly recommend that investors invest only after fully understanding these risks and doing so within a strict risk management framework to ensure fund safety.
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