US-China Tensions Amplify Cryptocurrency Systemic Risk

Cryptocurrency markets have been closely tied to geopolitical events in recent years, according to a new study published by researchers at Zhejiang Yuexiu University and other institutions. The study found that US-China tensions can be a significant warning signal for cryptocurrency contagion.

The research team gathered monthly data from August 2015 to February 2024 and used various metrics to measure the impact of geopolitical risks on cryptocurrencies, including the Total Connectedness Index (TCI) and the GPR index. They found that connectedness intensifies substantially during downside conditions, with TCI frequently exceeding 70% after 2018.

The study also examined the network of systemic connectedness among six major cryptocurrencies, including Bitcoin, Ethereum, Litecoin, Ripple, Stellar Lumens, and Dogecoin. The researchers found that Dogecoin and Stellar Lumens appear as significant net contributors, transmitting shocks broadly across the network, while Bitcoin and Ethereum act more as central hubs, absorbing spillovers and transferring them to secondary assets.

The study's findings suggest that cryptocurrency markets are more sensitive to geopolitical threats and escalatory rhetoric than to realized acts of conflict. The amplifying impact of bilateral tensions on systemic risk is most pronounced but requires a longer gestation period of up to three months.