Geopolitical risk, US-China tensions, and systemic risk in cryptocurrency markets: A regime-dependent analysis

Cryptocurrency markets have become increasingly integrated into the global financial system, yet their systemic vulnerabilities to geopolitical shocks remain poorly understood. This paper provides the first empirical analysis linking US-China tensions (UCT) to systemic risk in cryptocurrency markets. Using monthly data from August 2015 to February 2024, we measure systemic interconnectedness via a TVP-VAR Total Connectedness Index, applying linear and nonlinear ARDL frameworks to the full sample, as well as to bearish and bullish markets separately. The results reveal strong persistence in systemic risk. Crucially, UCT emerges as the dominant driver of contagion across all regimes, whereas general geopolitical risk (GPR) measures exhibit limited explanatory power. The nonlinear analysis uncovers symmetric long-run effects, indicating that the mere uncertainty of UCT, whether increasing or decreasing, elevates long-run systemic risk. Furthermore, lagged Bitcoin trading volume consistently exacerbates contagion across all regimes. These findings provide implications for regulators and investors, highlighting the necessity for regime-sensitive, geopolitically informed risk management strategies.