TL;DR

Background: Geopolitical risk is escalating, and the crypto market has become a high beta risk asset deeply embedded in the global macro cycle.

Quantitative framework: The GPR index can be broken down into "threats" and "actions," with negative effects primarily driven by "threats."

Transmission mechanism: Risk appetite switching | Concerns about inflation and interest rate cuts | Market structure amplification.

Causes of high beta: Strengthened correlation of risk assets + high leverage liquidation cascades + endogenous liquidity contraction.

Market outlook: Baseline scenario of volatile recovery | Pessimistic scenario of a second bottom | Optimistic scenario of high volatility and excess rebound.

Insight: Investors need to integrate geopolitical risk into a unified macro framework and dynamically assess its impact on risk premiums and liquidity.

1. Overview of Geopolitical Risks

1. What do geopolitical risks mean?

Geopolitical risk is often considered an "impact from a sudden news event." However, a more accurate understanding is that it is a collection of events and expectations—a combination of escalation of wars or conflicts, terrorist attacks, sanctions and counter-sanctions, diplomatic confrontations, obstruction of key shipping channels, trade frictions, and tariff escalations—all contributing to increased uncertainty about the future.

The key aspect of geopolitical risk is not the events themselves, but the market's re-pricing of future pathways. In other words, GPR acts as a "macro-level risk premium generator." It may not erupt every day, but as long as it rises, the market responds with higher discounts, stricter risk appetites, and tighter funding constraints.

1. How to quantify geopolitical risks?

The Geopolitical Risk Index (GPR Index) is compiled by economists Dario Caldara and Matteo Iacoviello from the Federal Reserve of the United States, statistically measuring the proportion of discussions regarding negative geopolitical events or threats in international newspapers since 1900, sourcing from the top 10 international newspapers.

The GPR Index is an indicator measuring changes in global geopolitical risk and is typically used to assess the potential impact of political instability, conflicts, wars, policy changes, and other factors on the economy and markets. More importantly, this system breaks down risks into two more "tradeable" parts:

• Threats: This is the phase where risk is brewing but has not yet materialized—intense discourse on threats, warnings, concerns, risks, tensions, etc. When threats rise, the market often first trades on "possibilities" (expectations), manifested in elevated fear indicators, stronger gold/USD performance, and the emergence of oil price risk premiums;
• Actions: This is the phase where risks have already occurred or escalated—reports on the start of war, escalating conflicts, and terrorist attacks increase. At this point, the market begins to trade on "real impact" (supply/demand/policy/growth), leading to greater volatility and a higher likelihood of cross-asset chain reactions.

According to data from the MacroMicro platform, the global geopolitical risk "threat" index significantly increased in January 2026, with a reading of 219.09. When the GPR rises, the market's first reaction is to reduce risk exposure before discussing bottom fishing. This is reflected in increased volatility (VIX rising), risk assets retreating, and safe-haven and cash assets becoming more popular.

Source: https://www.matteoiacoviello.com/gpr.htm

2. The Impact and Transmission of Geopolitical Risks

The rise of geopolitical risk (GPR) does not directly lead to fluctuations in the crypto market but first raises macro uncertainty, then transmits through multiple channels, ultimately resulting in violent synchronous fluctuations in the crypto market, a necessary outcome after macro pressure has transmitted and been amplified by market structure.

The GPR rise primarily operates through the following four mechanisms: (1) Risk appetite switching: VIX rising, credit spreads widening, overall risk asset reduction; (2) Energy and commodity shocks: Rising gold and oil prices, heightened inflation expectations; (3) Policy and liquidity repricing: Delayed expectations of interest rate cuts, strengthening USD, rebound in long-term interest rates; (4) Market structure amplification: Thin liquidity on weekends, high leverage derivatives, and forced liquidation cascades.

These mechanisms combined lead to the crypto market exhibiting “more violent” synchronous fluctuations compared to the stock market.

1. Risk appetite switching

Escalation of geopolitical conflicts first triggers risk aversion sentiment. Stock market risk aversion heats up, the volatility index VIX rises, and funds withdraw from high-volatility assets, shifting towards traditional safe-haven assets.

The VIX (Chicago Board Options Exchange Volatility Index) is a core indicator measuring expected volatility in the US stock market for the next 30 days, calculated based on the prices of S&P 500 index options, reflecting implied volatility rather than historical actual volatility. Due to its significant surge during market declines, it is referred to as the "fear index." Its value range can visually reflect market sentiment: below 20 indicates stable optimism; 20-30 indicates vigilance; over 30 indicates high fear; over 40 indicates extreme panic (commonly seen in major crises).

By March 2026, the VIX had quickly risen from around 14.50 at the beginning of the year to above 20, reflecting market panic over military conflicts and disruptions in energy supply chains. Gold, as a classic safe-haven asset, typically shows strong buying near the onset of geopolitical crises. Research by the World Gold Council indicates that each time the GPR rises by 100 points, the price of gold averages about a 2.5% increase. The spot price of gold is highly positively correlated with the GPR index, especially during sovereign credit risk or deteriorating situations, where its safe-haven value even surpasses that of traditional currencies.

1. Concerns About Inflation and Interest Rate Cuts

Escalation of geopolitical conflicts in the Middle East often initially impacts oil prices and shipping expectations, raising inflation concerns and forcing markets to lower interest rate cut expectations, creating persistent pressure on high valuation and high volatility assets.

The core driver of oil price fluctuations is the risk of supply disruptions rather than mere sentiment. The safety of key channels like the Strait of Hormuz directly determines the "geopolitical premium." If conflicts become prolonged, they will bring persistent inflationary pressure. If gold primarily reflects the safe-haven demand due to uncertainty in the financial system, oil prices directly mirror 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 repriced.

Brent crude oil prices have recently surged significantly, with monthly increases exceeding 20%. When geopolitical risks rise, energy price shocks and increased volatility often appear simultaneously, driving risk appetite switching and liquidity repricing. Rising oil prices exacerbate concerns about sticky inflation, directly undermining the certainty of interest rate cuts. When market expectations shift from "easing is on the way" to "higher rates for longer," crypto assets, seen as high volatility and high expectation items, often come under pressure first, especially during periods of thin liquidity.

Since early 2026, crude oil and the VIX have shown a high positive correlation, with both rising in sync, indicating that surging energy prices are directly driving market panic. Conversely, Bitcoin (BTC), viewed as "digital gold," has exhibited a clear negative correlation with the VIX, meaning that the more panic in the market, the larger the selling pressure on Bitcoin. The underlying reason is that rising oil prices intensify inflationary pressures, which reinforce expectations of high interest rates, creating a double blow for high-risk assets (Bitcoin) and the stock market (as indicated by the VIX).

1. Characteristics of the Crypto Market Structure

After macro pressure transmits through the previous three routes to the crypto market, its structural issues will further amplify shocks. The structural characteristics of the crypto market determine that it tends to exhibit more violent fluctuations during risk events than traditional risk assets:

• 24/7 trading: This makes weekends the most amplified periods for macro shocks: traditional markets are closed, hedging tools diminish, and market depth becomes shallow;
• High proportion of derivatives and leverage: Price declines easily trigger margin calls and forced liquidations, creating "passive selling" cascades;
• Significant liquidity stratification: Liquidity stratification inequity is evident in aspects such as large exchanges vs small exchanges, spot vs perpetual, mainstream coins vs altcoins; when risk appetite shrinks, liquidity quickly concentrates in leading assets, while tail assets suffer extreme declines.

It is these driving mechanisms that dictate that the "high beta" attribute of the crypto market is determined by mechanisms rather than purely by sentiment.

It is worth noting that when conflict compounds with sanctions, capital controls, or restrictions on the banking system, cryptocurrencies may become localized safe-haven tools due to their cross-border transfer and alternative settlement properties, providing some buying support. In the early stages of the Russia-Ukraine war, active fiat currency trading and significantly increased related demand were observed. While this path can provide short-term support, it is often difficult to reverse the trend of declines driven by macro risk appetite unless accompanied by stronger narratives such as prolonged inflation or sovereign debt crises.

The following chart drawn from Yahoo Finance illustrates a 6-month trend, with the blue shaded area representing the CBOE Volatility Index (VIX), overlaid with the performance of Brent crude futures, gold, and Bitcoin during the same period. Entering 2026, as geopolitical risks continued to escalate, the VIX index significantly rose, closing at 23.75 on March 6, 2026, while Brent crude rebounded strongly; gold, as a safe-haven asset, rose significantly; yet Bitcoin experienced severe retracement. This chart visually confirms that geopolitical risks propagate through the dual transmission path of "VIX surge + energy price spike," raising market volatility and inflation expectations on one hand, while exerting significant pressure on high beta risk assets like cryptocurrencies on the other.

Source: https://finance.yahoo.com/

3. Reasons for the High Beta of Crypto Assets

Many simplify BTC as "digital gold," but in most macro stages, it resembles "a high volatility version of the Nasdaq." The reasons mainly stem from three structural layers: the correlation incorporated into the pricing of risk assets, price discovery occurring more in derivatives, and the "endogenous liquidity cycle" constituted by stablecoins and exchange margins.

1. Correlation with Risk Assets

Research from CME Group illustrates that since 2020, the correlation between crypto assets and the Nasdaq 100 has been largely positive, and during certain periods in early 2025 and 2026, the rolling correlation could reach approximately +0.35 to +0.6 (notably stage-specific, not constant).

Source: https://www.cmegroup.com/insights/economic-research/

This means that once macro shocks trigger “risk assets to reduce positions together” (e.g., war escalation, oil price increase, delayed expectations for interest rate cuts), BTC cannot remain unaffected and often declines even faster, which exemplifies the first layer of "high beta."

1. High Leverage Amplifies Volatility

The severe fluctuations in the crypto market are often not caused by fundamental changes over 24 hours but rather by the chain of funding rates—margins—liquidations accelerating the "de-leveraging."

During the 2025 "1011" crash, over $19 billion in leveraged positions were liquidated within 24 hours, setting a record for the largest single-day liquidation in crypto history, while the open interest of perpetual contracts significantly contracted, indicating that "liquidation cascades" pushed an already fragile market toward nonlinear volatility.

1. Endogenous Liquidity Mechanism

When expectations for macro tightening rise, stablecoin funds become more cautious, borrowing and margin conditions tighten, and the market experiences "self-extraction": available margins decrease → passive position reduction → price drop → shrinkage of collateral → further passive position reduction.

It is evident that the crypto market does not primarily rely on central banks for "liquidity injections/withdrawals" like traditional markets but rather behaves like a system that automatically constricts liquidity under pressure, making it prone to sharp declines and rebounds.

So, is the "digital gold" narrative still valid? The rolling correlation between BTC and gold has limited historical peaks and has decreased to nearly 0 since 2024. Therefore, a more accurate framework is: BTC behaves more like a high beta risk asset under short-term shocks; in longer-term scenarios involving capital controls, sovereign credit issues, or heightened cross-border frictions, BTC is more likely to demonstrate the narrative advantages of "cross-border transfer, non-dilutable."

4. Outlook for Future Trends

The impact of geopolitics on crypto is essentially not about "Whether wars will benefit Bitcoin" but rather how risk appetite and liquidity conditions change. While risks in the Middle East remain uncertain, we will use a three-scenario framework to review possible pathways—key triggers—and corresponding trends.

1. Baseline Scenario: Volatile Recovery

Assuming that the conflict remains within a controllable range, with no long-term disruptions in key shipping and energy supplies, oil prices fluctuate at a high level but do not accelerate upward; market concerns about second-round inflation ease, VIX gradually retreats, and expectations for interest rate cuts "slowly repair" following data confirmation.

In such an environment, crypto, as a high beta asset, is unlikely to immediately emerge with a unilateral trend but is more likely to see a "range-bound fluctuation + slow upward adjustment" recovery: supported from below by a decline in risk premiums and bottom fishing, constrained from above by macro caution and the time needed for leverage recovery.

1. Pessimistic Scenario: Second Bottom

If the conflict spills over into a broader range, leading to substantial supply disruptions or prolonged increases in shipping costs, rising oil prices may lead to renewed inflation, forcing markets to further postpone interest rate cuts or even reprice higher real rate paths, overall putting downward pressure on valuations for risk assets.

At this time, the three amplifying mechanisms of crypto will compound: following risk assets’ declines + de-leveraging in derivatives + contraction in endogenous liquidity (both margin and borrowing conditions tightening), making it easier to exhibit structures of "accelerated declines—weak rebounds—breaking down again," typically referred to as a second bottom.

1. Optimistic Scenario: High Volatility Excess Rebound

If the risk events rapidly de-escalate, oil prices revert, VIX falls, while the macro signals clearer easing, and the market reaffirms interest rate cut paths, risk appetite will quickly restore.

Crypto often shows exceptionally resilient excess rebounds during these stages: capital inflows plus short covering, leveraged positions reopening, may lead to a "sharp rise" in prices. However, caution is warranted: the structural features of crypto determine that it often "rises quickly, and also retraces quickly," making it easy to experience significant pullbacks during overly heated sentiment.

5. Insights and Conclusion

Crypto assets have fully integrated into the global macro-financial cycle, no longer being an "independent narrative asset" drifting outside the mainstream, but rather a high beta risk asset pulled by oil prices, inflation expectations, interest rate paths, and volatility.

Three Insights

Insight 1: The real destructiveness of geopolitical risks lies in the proactive pricing of "threats" on risk premiums.

After the GPR index breaks down risks into "threats" and "actions," the negative effects are primarily driven by the former. This means that the market often completes repricing through spikes in VIX, oil price premiums, and delayed interest rate cuts even before conflicts escalate, manifesting the notion that “expectation equals reality.”

Insight 2: The high beta characteristics of the crypto market are an inevitable result of both macro transmission and market structure interactions.

Risk appetite switching, concerns about inflation and interest rates, and policy liquidity repricing, along with the four mechanisms of 24/7 trading, high leverage liquidations, and endogenous liquidity contractions reinforce each other, making crypto assets exhibit fluctuations significantly stronger than traditional markets under similar macro shocks. This is not sentiment-driven but mechanism-driven.

Insight 3: The macroeconomic aspect of Bitcoin has become an irreversible structural trend.

Bitcoin and US stocks have transitioned to a long-term positive correlation, indicating that Bitcoin is increasingly traded as a risk-sensitive asset. In the short term, it behaves more like “a high volatility version of the Nasdaq”; in the medium term, only in scenarios involving capital controls, sovereign credit crises, or intensified cross-border frictions will the attribute of "digital gold" truly emerge.

Conclusion

In the current environment of high interest rates + geopolitical conflicts, Bitcoin's attributes of being "digital gold" are temporarily dominated by its high beta risk characteristics. Investors who understand the transmission mechanisms of geopolitical risks will shift from passively enduring volatility to actively seizing opportunities. Only by transforming geopolitical uncertainties into quantifiable risk premiums and liquidity signals, dynamically assessing their impact on asset allocation, can rational decisions be made amid complex situations. The long-term value of the crypto market never lies in avoiding macro cycles but in profoundly understanding and utilizing them.

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