Cryptocurrency Market Volatility and Its Spillover Effects on Traditional Financial Markets

Abstract

The fast growth of cryptocurrency markets since 2017 has transformed digital assets from a marginal speculative place into a class of instruments closely watched by institutional investors, central banks, and financial regulators. This article look at the volatility characteristics of cryptocurrency markets and the mechanisms through which that volatility spills over into traditional financial markets, including equities, foreign exchange, sovereign bonds, and commodities. Drawing on the empirical literature employing GARCH-family models, the Diebold-Yilmaz connectedness background, time-varying limit vector autoregression (TVP-VAR), and quantile-based spillover methods, the article synthesizes evidence on the direction, magnitude, and temporal evolution of cross-market volatility transmission. It further evaluates the crisis episodes of 2020 (the COVID-19 shock), 2022 (the Terra/Luna collapse and the FTX bankruptcy), and 2023 (the Silicon Valley Bank failure and the associated USDC depeg) as natural experiments in contagion. The article argues that spillover intensity is time-varying, asymmetric, and regime-dependent, rising sharply during periods of market stress and receding during calm periods, and that the safe-haven properties long attributed to Bitcoin have weakened as institutional adoption has deepened the integration of crypto assets with traditional finance. The article closes with a discussion of regulatory responses, including the European Union's Markets in Crypto-Assets (MiCA) framework, and implications for portfolio risk management, financial stability surveillance, and future research.