Abstract
This study examines whether cryptocurrencies, specifically volatile assets (Bitcoin and Ethereum) and fiat-backed stablecoins (USDT and USDC), offer hedging, diversification, or safe-haven benefits for equity and bond portfolios under different sovereign-risk regimes in South Africa. Using weekly data from 2019 to 2025, a two-state Markov Switching Model applied to South African 5-year sovereign Credit Default Swap (CDS) spreads identifies high- and low-sovereign-risk periods, Wavelet Coherence captures time-frequency co-movements, and MODWT regressions quantify short- and long-horizon effects.
The findings show that cryptocurrency behaviour is both regime-dependent and asset-specific. Stablecoins display negative correlations with sovereign CDS spreads and equity markets during high-risk periods, indicating short-term hedging and safe-haven properties. Their correlations weaken in low-risk regimes, suggesting a transition toward diversification. In contrast, Bitcoin and Ethereum exhibit persistent positive co-movements with equities and bond yields across most horizons, reflecting pro-cyclical behaviour and limited risk-management value during sovereign stress.
Overall, the results demonstrate that stablecoins, not volatile cryptocurrencies, provide meaningful portfolio resilience in periods of elevated sovereign risk. These insights contribute to the literature by highlighting the importance of distinguishing cryptocurrency types and conditioning their evaluation on sovereign-risk regimes. More broadly, the findings offer a framework for understanding how cryptocurrencies may function in other emerging markets facing fiscal instability, credit-rating pressures, or sovereign risk shocks.