Network transitions in the cryptocurrency market: The impact of regional conflicts

Abstract

This paper analyses the evolution of the cryptocurrency market network structure during two recent military conflicts: the first year of the 2022 Russia–Ukraine war and the first six months of the 2023 Israel–Hamas war, compared with pre-war periods. Analysing data covering the two periods of 1st January 2020 to 31st December 2022 (Russia–Ukraine), and 1st September 2022 to 29th February 2024 (Israel–Hamas), our findings reveal that before both wars officially began, the cryptocurrency network exhibited high interconnectedness, possibly due to investors anticipating conflict and shifting investments into cryptocurrencies. After the conflicts started, the network became significantly disconnected, with the Russia–Ukraine war showing a “small world” effect, where larger cryptocurrencies remained interconnected, while smaller cryptocurrencies became disconnected. In contrast, during the Israel–Hamas conflict, larger cryptocurrencies became more disconnected, driving overall network disconnectivity. Further analysis using the TVP-SV-VAR model showed that macroeconomic variables such as geopolitical risk, the U.S. Dollar Index, oil volatility and gold returns, as well as the Google Trend Index had a significant impact on the network’s structure, with varying effects across conflicts. Geopolitical risk exerted a stronger positive influence on centrality measures during the Israel–Hamas conflict, the Dollar index had a sharp negative effect on centrality following the Russia–Ukraine war, and oil volatility consistently enhanced network centrality and density in both conflicts. Gold returns shifted from having a negative to a positive effect on network connectivity, especially boosting intermediary roles during the Israel Hamas conflict, and the Google Trend Index consistently increased network centrality, highlighting the impact of rising market attention and sentiment. These results are crucial for understanding how military conflicts and economic factors impact cryptocurrency networks, providing valuable insights for academics, investors, policymakers, and legal authorities on market efficiency, risk management, and the potential use of blockchain-based assets in evading sanctions and facilitating cybercrime. As both conflicts are ongoing, future research should focus on analysing extended war periods and the influence of regulatory actions, sanctions, and cryptocurrency-specific events.