Decoupling and contagion in bitcoin markets: Evidence from a Bayesian volatility model

This paper examines Bitcoin’s shifting role as either a systemic risk amplifier or adecoupling hedge across different financial regimes. Using a Bayesian time-varying parameter VAR with stochastic volatility (TVP-VARSV), I analyze Bitcoin’s dynamic connectedness with traditional assets, including gold, the S&P 500, and U.S. Treasury bonds. The results reveal strong asymmetries: Bitcoin amplifies stress during turbulent periods, aligning with risk assets, while exhibiting decoupling behavior under stable conditions—traits that static models often overlook. I also assess implications for portfolio design and regulation. A backtested ESG-constrained strategy based on regime classification enhances downside protection. The approach supports compliance with emerging frameworks such as Markets in Crypto Asset Regulation (MiCA) and Basel III bank regulation, offering actionable insights for institutional crypto integration within established financial ecosystems.