image: Three major crisis have marked the history of Bitcoin: 1) the European sovereign debt crisis, 2) the collapse of the Mt. Gox exchange, 3) the period of increased cryptocurrency regulation, and the COVID-19 pandemic.
Credit: Sirine Ben Yaala and Jamel Eddine Henchiri (University of Gabes, Tunisia)
Background and Motivation
Climate change poses systemic risks to global financial markets, yet its impact on cryptocurrencies remains understudied. Traditional finance research has extensively examined physical risks and transition risks in stocks and bonds, but cryptocurrencies’ unique characteristics demand specialised analysis. This study addresses a critical gap: how acute and chronic climate risks, coupled with technological and regulatory shifts, influence cryptocurrency volatility during crises. China Finance Review International (CFRI) is pleased to present the paper titled “Climate risks and cryptocurrency volatility: evidence from crypto market crisis”, which aligns with global calls to integrate climate considerations into financial stability frameworks, particularly as cryptocurrencies face increasing scrutiny over their environmental footprint.
Methodology and Scope
The study employed a fuzzy logic model to analyse non-linear relationships between climate indices (PRI/TRI) and cryptocurrency volatility. The fuzzy logic framework excels in handling uncertainty, making it ideal for capturing chaotic market responses to climate shocks.
Key Findings and Contributions
- Climate Risks Amplify Volatility: Acute Risks and Chronic Risks significantly raise volatility. Transition Risks triggered sharp declines, underscoring the sector’s sensitivity to policy shifts.
- Cryptocurrency Sensitivity: Bitcoin and Ethereum exhibited the highest volatility responses, reflecting their dominance and energy dependency. Litecoin and Ripple showed lower but still significant sensitivity, challenging assumptions that smaller altcoins are immune to climate risks.
- Methodological Innovation: The fuzzy logic model achieved RMSE < 0.02 for most currencies, outperforming traditional linear models. A 3D surface plot visualised how PRI/TRI synergies drive volatility, revealing non-linear thresholds (e.g., PRI > 0.8 + TRI > 0.7 = extreme volatility).
Why It Matters
- Investor Implications: Climate risks are no longer peripheral considerations but integral components of portfolio strategies. Investors must prioritise diversification and conduct rigorous stress-testing against PRI/TRI scenarios to safeguard their investments.
- Regulatory Relevance: Regulatory frameworks must adapt to align with climate goals, incorporating measures like carbon taxes and incentives for renewable mining. This alignment is crucial for market stability. However, given the transboundary nature of crypto markets, global coordination is imperative.
- Environmental Sustainability: The study underscores the urgent imperative for greener blockchain technology. Innovations such as proof-of-stake mechanisms and carbon offset initiatives are not just options but necessities.
- Future Directions: Future research should extend the analysis to burgeoning segments, as they hold significant potential and challenges. Incorporating real-time climate data and investor sentiment metrics will enhance the granularity and relevance of our insights, which will enable stakeholders to navigate the intersection of crypto and climate with greater precision and foresight.
Discover high-quality academic insights in finance from this article published in China Finance Review International. Click the DOI below to read the full-text original!
Journal
China Finance Review International
Method of Research
News article
Article Title
Climate risks and cryptocurrency volatility: evidence from crypto market crisis
Article Publication Date
31-Mar-2025