The Relationship Between Stablecoin and Cryptocurrency Returns During Periods of Market Stress

Active asset managers increasingly include cryptocurrencies in their alternative asset allocations, highlighting their speculative and volatile nature. The aim of this research is to examine trends in the returns and volatility of cryptocurrencies, whilst accounting for the depegging of stablecoins, driven by speculative trading during macroeconomic shocks and technological shifts. We build a sample of market capitalisation, using data from the daily closing prices of Bitcoin (BTC), Ethereum (ETH), Binance (BNB), and Ripple (XRP), two fiat-backed stablecoins (USDT and USDC), and a cryptocurrency-collateralised stablecoin (DAI). As a first step, a Granger-causality framework is applied to examine the influence of stablecoin depegging events on crypto returns during financial market stress. The results are strongly asymmetric: there is little evidence that depegs predict returns; whereas cryptocurrency returns robustly Granger-cause USDC depegging events, an effect that intensifies during periods of market stress. Stablecoin depegs appear to be a downstream symptom of cryptocurrency stress rather than a leading indicator of it. The analysis was extended by modelling volatility, using an EGARCH-X model to study whether depegs also affect crypto during periods of market stress and if larger deviations from the dollar peg are associated with higher cryptocurrency volatility, concentrated in the most liquid stablecoins (USDT and USDC), while the evidence for any change in this association during stress is limited. The findings carry implications for risk monitoring in digital-asset markets, where stablecoin behaviour reflects, rather than anticipates, cryptocurrency market conditions.