Volatile Crypto Could Increase Systemic Risks in the Energy Sector

In the face of rising energy prices and questions about the sources of this issue – from a lack of renewable investment to the war in Ukraine – Yuqian Zhao from Kent Business School (University of Kent) suggests that other factors may be at play.

Ongoing research by Yuqian Zhao reveals that the formation of cryptocurrency bubbles, especially when the bubbles burst, significantly increases systemic risks in the energy sector. Financialisaton has brought new challenges to international energy markets, making energy systemic risk a more complicated issue. This research has clear policy implications for energy firms and regulators and could help protect consumers from price fluctuation.

Yuqian Zhao said: ‘The bubbles in cryptocurrencies can induce higher systemic risks in the whole energy sector, leading to stronger needs to hedge against such risks. Existing literature on “safe-haven assets” suggests that cryptocurrency may act as a safe-haven asset, but the findings here show that extra caution should be taken when forming hedging strategies using cryptocurrency, as the frequent bubbles can cause higher risks.

‘Regulators may not be able to control cryptocurrencies directly, but they should take cryptocurrency bubbles as a signal for increasing systemic risks in stock markets, or specifically, energy sector and respond to such shocks accordingly. Our research makes it clear that the executives of energy firms need to pay attention to the fluctuation of cryptocurrency prices, especially when observing pricing bubbles in the markets.’

Dr. Yuqian Zhao is a Senior Lecturer (Associate Professor) in Finance. Yuqian’s primary research interests lie in the area of financial econometrics, change point detection, functional data analysis in finance and empirical asset pricing.

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