The increasing popularity of cryptocurrencies as alternative financial assets has spurred interest in understanding their behavior during periods of economic uncertainty. This study focuses on the relationship between economic policy uncertainty (EPU) and the returns of three major cryptocurrencies: Bitcoin (BTC), Ethereum (ETH), and Tether (USDT). The dramatic price fluctuations in cryptocurrencies highlight the inherent risks associated with these assets, raising questions about their suitability as hedging instruments. While previous studies have examined the impact of various uncertainty measures on Bitcoin, this research expands upon the existing literature by analyzing the impact of EPU on three prominent cryptocurrencies, employing a comprehensive methodology and a time period (January 2021 to April 2023) encompassing the post-COVID-19 economic landscape. The post-COVID-19 period is particularly relevant because the pandemic introduced unprecedented levels of global uncertainty. This study contributes to the existing literature by: 1) providing a thorough literature review, identifying existing gaps and informing future research directions; and 2) delivering significant insights relevant to investors, academics, policymakers, businesses, professionals, and society at large.

Existing literature on cryptocurrencies is divided on their role as a medium of exchange or merely a volatile asset. Some studies suggest Bitcoin's potential as a hedge against uncertainty, similar to gold, while others dispute this claim. Differences in study periods, methodologies, and the specific cryptocurrencies examined contribute to conflicting results. Previous studies have explored Bitcoin's relationship with various uncertainty measures, such as the VIX and trade policy uncertainty (TPU). These studies revealed mixed results, with some indicating negative correlations and others suggesting a potential for hedging during bull markets. This study aims to fill the gap in the literature by focusing on the nexus between EPU and the returns of three major cryptocurrencies, including a focus on asymmetric effects and country-specific analyses.

This empirical study utilizes monthly data from January 2021 to April 2023. The dependent variables are the returns of Bitcoin, Ethereum, and Tether, obtained from coindesk.com. The independent variable is the EPU index, sourced from policyuncertainty.com. Gold returns, from investing.com, serve as a benchmark for comparison. The study employs several econometric techniques: 1. **Quantile Regression (QR):** QR is used to analyze the relationship between EPU and cryptocurrency returns across different quantiles, revealing how the relationship varies at different points of the return distribution. This method is particularly useful for handling non-normally distributed data and nonlinear relationships. 2. **Granger Causality Test:** This test examines the causal relationships between EPU and the returns of the three cryptocurrencies. 3. **Nonlinear Autoregressive Distributed Lag (NARDL):** NARDL is used to investigate the asymmetric effects of positive and negative EPU shocks on cryptocurrency returns in both the short and long term. This analysis allows for a more nuanced understanding of how changes in EPU impact cryptocurrency prices. The study also conducts a robustness check using gold returns as an alternative hedging asset. In addition, country-specific analyses focusing on the US and China markets are undertaken to explore the effect of local EPU on cryptocurrency behavior. This helps account for the varied influence of country specific economic and political policies on this global market. Principal component analysis (PCA) is used to form an index that combines the returns of the three cryptocurrencies allowing for an overall assessment of the EPU's impact. The use of a post-COVID-19 dataset allows analysis of a period characterized by high global uncertainty.

The quantile regression results show that the relationship between EPU and cryptocurrency returns is not uniform across all quantiles. In the case of Bitcoin, the initial quantiles displayed positive relationships, whereas at higher quantiles, the relationship became negative and statistically significant. Ethereum showed a slightly different pattern; Tether’s relationship with EPU was mostly positive, albeit insignificant. The Granger causality test indicated significant relationships between EPU and both Bitcoin and Ethereum returns, suggesting that EPU does impact cryptocurrency returns. The NARDL analysis revealed that, in the short-term, both Bitcoin and Ethereum can serve as hedging instruments against positive EPU shocks. In the long-term, however, this hedging property diminishes. Tether showed a positive and significant relationship with EPU in the long run, indicating a safe-haven characteristic during uncertainty. The country-specific analysis revealed insignificant effects of Chinese EPU on Bitcoin returns, contrasting with the negative effect observed for US EPU. This highlights the importance of the US as the dominant global economy and its greater impact on global financial markets. Heterogeneity tests confirmed that the impact of EPU on cryptocurrencies is not uniform.

The findings support the hypothesis that cryptocurrencies, specifically Bitcoin and Ethereum, can serve as short-term hedging instruments against economic policy uncertainty, but this function is less pronounced in the long run. The asymmetric impact of EPU on cryptocurrency returns emphasizes the importance of using appropriate analytical tools. The finding that US EPU has a greater impact on cryptocurrency returns than China EPU underscores the importance of the US as the dominant global economy. The differing responses of Bitcoin, Ethereum, and Tether highlight the unique characteristics of each cryptocurrency and their suitability for different investment strategies. The results suggest investors might employ different strategies for short-term versus long-term investments in these cryptocurrencies.

This study offers valuable insights into the dynamic relationship between EPU and cryptocurrencies. Bitcoin and Ethereum exhibit short-term hedging potential, while Tether displays long-term safe-haven characteristics. The study's findings have implications for portfolio diversification and risk management strategies. Future research could explore the impact of other types of uncertainty on cryptocurrencies, examine the effects of regulatory changes on cryptocurrency markets, and investigate the role of country-specific factors on cryptocurrency behavior more deeply. Further research should analyze the impact of cryptocurrency markets on other financial assets and delve into the various forms of cryptocurrency and their unique impacts.

The study's limitations include the focus on a specific period (post-COVID-19) and a relatively limited selection of cryptocurrencies. Future research could expand the sample period and include a wider array of cryptocurrencies. The use of specific indices such as EPU may not capture the full range of economic uncertainty affecting cryptocurrency markets. Additionally, the study’s reliance on particular econometric techniques might leave room for alternative interpretations. The specific characteristics of the selected cryptocurrencies might lead to findings not generalizable to all cryptocurrencies. Furthermore, external factors beyond the scope of the EPU index could influence cryptocurrency markets.