Stablecoins as Dry Powder: A Copula-Based Risk Analysis of Cryptocurrency Markets
2026-03-24 • Computational Engineering, Finance, and Science
Computational Engineering, Finance, and Science
AI summaryⓘ
The authors studied how stablecoins, which connect regular money to digital assets, affect the risks in the wider cryptocurrency market. They found that changes in stablecoin activity and volatility can predict similar changes in cryptocurrencies over different time frames. Including stablecoin data helps make better predictions about cryptocurrency prices and reduces risk in investment strategies. Their work shows that stablecoins play an important role in how market movements spread.
StablecoinsDecentralised Finance (DeFi)Cryptocurrency VolatilityCopula MethodsSystemic RiskMarket ForecastingVolatility TargetingPrice StabilityFinancial Risk Transmission
Authors
Elliot Jones, Toshiko Matsui, William Knottenbelt
Abstract
Stablecoins serve as the fundamental infrastructure for Decentralised Finance (DeFi), acting as the primary bridge between fiat currencies and the digital asset ecosystem. While peg stability is well-documented, the structural role stablecoins play in transmitting systemic risk to the broader market remains under-explored. This study uses copula-based approaches to quantify the transmission of volatility and activity from stablecoin to cryptocurrency markets. We demonstrate in-sample causality across daily, weekly, and monthly horizons. Furthermore, we show that incorporating stablecoin factors significantly reduces Mean Squared Error in cryptocurrency forecasting. Specifically, we link stablecoin volume and upside volatility to broader market volatility, indicating its role as dry powder. Finally, we establish economic value by demonstrating reduced risk in a cryptocurrency volatility targeting model when stablecoin factors are employed.