Quantile-based connectedness in the crypto-stablecoin network across market conditions

Abstract

This paper examines the directional connectedness between the returns of Bitcoin and Ethereum and the supply of stablecoins across different market conditions. Using a Quantile Vector Autoregression (QVAR) model, we analyze daily log-returns of major cryptocurrencies and changes in stablecoin supply from January 2021 to November 2024, capturing dynamics at the 5th, 50th, and 95th quantiles. Our findings show that the Total Connectedness Index (TCI) nearly triples under extreme conditions, with Bitcoin and Ethereum transitioning from passive roles in normal periods to dominant transmitters of influence during downturns. Stablecoins behave heterogeneously across regimes, with roles varying significantly even within the same subclass. Tether exhibits state-dependent behavior, acting as a net receiver of shocks in most conditions but emerging as a transmitter during bull markets. We also assessed the impact of the Terra-LUNA collapse, revealing a regime shift in the transmission of shocks: connectedness rises under normal and negative conditions but declines in positive markets. These patterns suggest that, under certain conditions, major cryptocurrencies can influence stablecoin issuance in distinct ways, leading to asymmetric adjustments in supply across individual stablecoins and shaping liquidity dynamics throughout the ecosystem. While we do not attempt to model the underlying mechanisms behind these shifts, our results point to the importance of monitoring state-dependent relationships and recognizing the diverse behaviors of stablecoins. The findings motivate the development of regime-sensitive monitoring tools and support ongoing policy discussions around stablecoin design, issuance frameworks, and market transparency.