Uncertainty in the Digital Age: Investigating the Impact of Economic Policy Uncertainty on Cryptocurrency Volatility

Abstract

In recent years, the volatility of cryptocurrency markets has been a major concern for investors, policymakers, and researchers. This study examines the impact of Economic Policy Uncertainty (EPU) on cryptocurrency volatility, focusing on Bitcoin as a representative digital asset. Utilizing a daily dataset from 2014 to 2023, we employ GARCH(1,1) and GARCH-X models to assess volatility persistence and the influence of EPU on price fluctuations. Additionally, a Vector Autoregression (VAR) model and Granger causality tests are applied to analyze the dynamic interdependencies between EPU and Bitcoin returns. The findings reveal that higher economic policy uncertainty significantly increases Bitcoin volatility, indicating that investors react strongly to policy-related risks. The GARCH-X model confirms that EPU is a significant determinant of cryptocurrency price swings, while VAR analysis and impulse response functions (IRFs) suggest that policy uncertainty shocks lead to heightened Bitcoin volatility over a short-term horizon. However, Bitcoin price movements do not significantly influence economic policy uncertainty, reinforcing the view that cryptocurrencies behave as speculative rather than safe-haven assets during periods of policy instability. These results have crucial implications for portfolio risk management, regulatory policies, and investment strategies. Policymakers should consider the spillover effects of economic uncertainty on crypto markets, while investors may use EPU as a predictive indicator for volatility trading strategies. Future research can extend this study by incorporating alternative cryptocurrencies, machine learning-based forecasting models, and global uncertainty indices.