How digital currencies reshape market stability in developed and emerging economies

A new study published in the International Journal of Financial Studies reveals that cryptocurrencies such as Bitcoin and Ethereum are powerful transmitters of short-term shocks across financial markets, while traditional assets like stocks and conventional currencies dominate in the long term.

The research, titled "The Dynamic Relationship Between Digital Currency and Other Financial Assets in Developed and Emerging Markets," provides a deep comparative analysis of how digital and conventional assets interact across time horizons and markets, offering valuable insights for investors, policymakers, and financial regulators navigating the rapidly evolving digital economy.

Unraveling market dynamics: Cryptocurrencies as short-term shock transmitters

The authors examined the dynamic linkages between cryptocurrencies, stock markets, and conventional currencies in both a developed economy (the United States) and an emerging economy (South Africa). Using data from November 2017 to September 2022, the study analyzed how financial assets influence one another in different time horizons by combining the Diebold–Yilmaz spillover index and network topology drawn from graph theory. The approach allowed the authors to measure how shocks move through interconnected assets and to identify which instruments act as primary transmitters or receivers of volatility.

The findings show that Bitcoin and Ethereum play dominant roles as net transmitters of shocks in both markets, particularly in the short term. The interconnectedness of financial assets intensifies during periods of global uncertainty, such as the COVID-19 crisis, when digital currencies become more central to overall market movements. This heightened transmission suggests that cryptocurrencies not only influence investor sentiment but can also spread volatility rapidly across different asset classes.

The study also reveals that Ethereum consistently occupies a high-centrality position, serving as a bridge between traditional and digital financial systems. Its strong interconnection with other assets underlines its growing role as an essential medium for cross-asset interactions in global finance. Meanwhile, Ripple and other alternative coins, while influential, have smaller systemic impacts relative to Bitcoin and Ethereum.

Developed vs. emerging markets: Diverging structures of financial connectivity

By comparing two contrasting markets, the United States as a developed economy and South Africa as an emerging one, the researchers identify key structural differences in how assets interact. In the United States, the financial system exhibits greater overall connectivity, reflecting deep integration between digital and conventional assets. In the short run, all asset classes are closely linked, amplifying the effect of market shocks. However, over longer periods, these assets form two distinct communities: one led by traditional instruments like the S&P 500 and the U.S. dollar index, and another dominated by digital assets such as Bitcoin and Ethereum. This bifurcation, according to the authors, reflects investor behavior, where market participants rely on cryptocurrencies for speculative short-term gains but prefer conventional assets for stability and long-term security.

In South Africa, the pattern differs significantly. The study finds a less cohesive network, with cryptocurrencies still operating somewhat on the periphery of the financial system. While digital assets remain strong transmitters of volatility, their influence on broader market dynamics is less pronounced compared to developed economies. This difference underscores the varying pace of digital asset integration in emerging markets, where infrastructure, regulation, and investor depth are still evolving.

These findings highlight that market maturity plays a decisive role in determining how digital and traditional assets interact. Developed markets tend to display higher synchronization between asset classes, which enhances efficiency but also increases the risk of contagion during crises. Emerging markets, by contrast, experience lower integration, offering partial insulation from global digital asset shocks but also limiting the benefits of diversification and financial innovation.

Policy lessons and future outlook for digital finance

Beyond market-specific observations, the study offers a broader perspective on the future of financial integration in the age of digital currencies. The authors note that as cryptocurrencies mature and their adoption widens, their influence will extend beyond short-term volatility to affect long-term investment strategies, monetary policy transmission, and systemic risk management. Policymakers, therefore, must adapt regulatory frameworks to reflect the growing interdependence between traditional and digital financial instruments.

The research calls for robust monitoring mechanisms to track cross-asset spillovers and for enhanced transparency in cryptocurrency markets to mitigate contagion effects. Regulators are urged to develop harmonized policies that account for the dual nature of digital assets, both as innovation drivers and as potential sources of systemic instability. This includes stronger collaboration between central banks, financial institutions, and technology providers to manage risks related to market manipulation, liquidity shortages, and cyber vulnerabilities.

For investors, the findings carry critical strategic implications. The dominance of cryptocurrencies as short-term transmitters suggests that they can serve as early indicators of market turbulence, while traditional assets continue to provide anchorage for long-term portfolio stability. In practical terms, risk managers and asset allocators can leverage these insights to design hedging and diversification strategies that account for temporal variations in asset connectedness.

The authors also call for further research, particularly involving additional markets and asset classes such as commodities and sovereign bonds, to refine understanding of how digital currencies interact with broader financial ecosystems. Expanding the analytical framework to include other regions and testing alternative connectedness methodologies could enhance the robustness and generalizability of the findings.