Cryptos Under Pressure

Cryptocurrencies are the most recent and disruptive innovation in the global financial system. Since their beginning in 2009, when the bitcoin (BTC) first went online, the capitalization of cryptocurrencies has reached $2T in 2024. Investors can trade cryptos on the respective blockchains or via digital intermediaries; crypto trades have become very popular, even among unsophisticated investors. 

Cryptocurrencies have also attracted large media coverage recently, following the controversial involvements of prominent politicians in the crypto markets. A notable example is Argentina’s President Milei promoting the $Libra coin, whose price swiftly collapsed after skyrocketing following Milei’s announcement, and caused a total loss of $250M. A second example is US President Trump’s plan for a national crypto reserve. Were the plan perceived as concrete, the crypto prices would probably go up in anticipation of federal purchases. This would favor crypto creators and insiders, including the Trump family involved in the crypto business, at the expenses of the US taxpayers. 

The Milei and Trump cases are just two striking examples of how economic policy uncertainty shocks can impact financial markets and, in particular, the crypto markets, influencing price formation, returns and trading volumes. 

Crypto prices have always shown high volatility and have been hit over the years by several episodes of periodically exploding bubbles, both short- and long-lived (see Oldani et al. 2025). This behavior can be partly explained by the limited supply schemes of cryptocurrencies, which naturally pressures prices and limits the volumes of transactions. For example, the supply of BTC, the crypto with the highest market capitalization, is inelastic, being limited and pre-defined in the protocol of the blockchain at 21 million tokens, with a decreasing path over time. As of 27/03/25 the total supply of BTC is of 19.4 million tokens for a market cap of $1.72T (coinmarketcap.com). Indeed, as opposed to the exuberant behavior of prices, crypto returns and trading volumes are quite stationary over time and a similar behavior also characterizes indexes of economic policy uncertainty (EPU), both national and global (GEPU). 

Many recent studies, most of them focused on BTC, have examined the impact of the EPU indexes on crypto returns and volatility. There is consensus among researchers that economic policy uncertainties exacerbate the volatility of crypto currencies, compared to conventional financial assets. On the other hand, it has also been found that cryptos can have, in specific circumstances and depending on the magnitude of the uncertainty shocks, hedging/diversification ability (Fang et al. 2019, Miba’am and Güngör, 2025), which can make them attractive for investors, compared to traditional assets, such as equity, bonds or commodities.

To get a more complete picture on the impact of policy uncertainties on cryptos we have analyzed (Oldani, Bruno and Signorelli, 2023) the trading volumes of BTC, Ether (ETH) and Ripple (XRP), the three major cryptos for market capitalization, in comparison with the GEPU index and the European News-Based Uncertainty Index (ENBI), a news-based index of uncertainty computed from news related to policy-related economic uncertainty (Baker et al., 2016). Using regression models we found a robust positive relationship between the volumes of each crypto and each of the two EPU indexes, both in the short and long run. This is consistent with the view of BTC as a safe haven against economic policy uncertainty, as found by Miba’am and Güngör (2025). 

Based on the characteristics of crypto investors and the high volatility of crypto returns, there is another explanation for the EPU-induced expansion in trading volumes. From various independent surveys it is known that the average investor in crypto is a young male with a mid- to low-degree of financial literacy, and that looks for high-risk and high returns in his investment decisions (Xi et al., 2020). This evidence is consistent with the findings of a recent paper (Corbet et al, 2024) that estimates average risk aversion to be negative in five crypto markets out of 11, with small positive values for the remaining six markets, including BTC, ETH and XRP. Then, if the volatility of crypto returns is magnified by the uncertainty shocks, as evidenced for example in Fang et al. (2019), the resulting expansion in trading volumes could be thought of as a flight to risk of mainly unsophisticated investors.

Which of the two explanations is the most relevant for the expansion in the crypto trading volumes induced by EPU shocks is a matter of further empirical research. But it is clear that the latter would recommend monitoring and supervision for digital intermediaries and exchanges by domestic authorities.