Financial Stability is this research explored the linkages and volatility interactions between cryptocurrency and traditional financial markets in Africa’s five largest economies, focusing on concerns about possible spillover risks, particularly given the high volatility and limited regulation of cryptocurrencies. The study applied both diagonal BEKK-GARCH and DCC-GARCH models to test for spillover effects and correlations across the two markets. Using a daily dataset covering the period from January 1, 2017, to December 31, 2021, the analysis assessed contagion effects.

The results indicate a notable spillover from cryptocurrencies to African financial markets, though the overall magnitude remains relatively low but increasing over time. Specifically, Financial Stability there is insufficient evidence to confirm spillovers from cryptocurrencies into Egypt’s and Morocco’s financial markets in the short term. By contrast, in South Africa, Nigeria, and Kenya, the findings point to a moderate but rising degree of spillover from cryptocurrencies to financial markets. Furthermore, no significant evidence was found of spillover effects moving in the opposite direction by Financial Stability—from African financial markets to cryptocurrencies.

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The conditional correlation estimates from the DCC-GARCH model revealed a low to moderate but positive relationship between cryptocurrency volatility and African financial market fluctuations. Importantly, the DCC-GARCH analysis also suggested stronger integration between the two markets over the long run. These insights carry policy implications for financial regulators monitoring the interaction between these markets, Financial Stability as well as for investors considering portfolio diversification strategies across them.

The rise of cryptocurrency within the financial industry has significantly disrupted the traditional system, much like how social media reshaped the conventional media landscape. Cryptocurrencies seek to transform the established financial framework by offering consumers a decentralized alternative that enables community-based funding (such as crowdfunding) and transactions. Unlike the centralized nature of traditional finance, where accessing funds often comes at a high cost (Ghorbel and Jeribi 2021), Financial Stability decentralized finance allows individuals to conduct peer-to-peer transactions without the involvement of banks or government institutions. This means that monetary exchanges can take place beyond the supervision of regulatory authorities like central banks or state agencies (Halaburda et al. 2020).

Although cryptocurrencies have gained significant popularity and adoption among users, especially across Africa, their growing use as financial instruments has raised concerns for regulators and governments globally. Studies reveal that cryptocurrencies are highly volatile, can be exploited for money laundering and terrorism financing, and may foster corruption in emerging economies (Halaburda et al. 2020; Joseph et al. 2022; Hasan et al. 2022; Qiao et al. 2023; Xu et al. 2019). Given their short existence, minimal regulatory control, and absence of established valuation mechanisms, these risks create conditions of Knightian uncertainty for many regions (Mao et al. 2023).

Consequently, research has explored the relationship between cryptocurrencies and traditional financial systems, with two main strands of findings. The first group of studies observes little to no correlation between the two markets, suggesting that cryptocurrencies act more as a hedge or portfolio diversifier than as a systemic threat (Kliber et al. 2019; Shahzad et al. 2020; Majdoub et al. 2021). This aligns with portfolio theory, which maintains that investors can reduce risk by diversifying across assets with varying risk-return profiles. The second group of studies, however, notes a moderate but increasing linkage between cryptocurrencies and conventional finance, leading many scholars to advocate for tighter regulation to curb potential spillovers (Iyer 2022).

On the question of whether crises within the cryptocurrency market affect the traditional financial system, some research reports little evidence of such spillovers (Zang et al. 2018; Kumah and Odei-Mensah 2021). In contrast, other works highlight significant co-movements in volatility between the two markets, indicating that turmoil in cryptocurrency can indeed transmit to traditional finance (Omane-Adjepong and Alagidede 2019). For instance, Symitsi and Konstantinos (2018) identified a two-way spillover effect, whereby shocks in the conventional market can influence cryptocurrency, and disruptions in cryptocurrency can similarly affect the traditional financial sector. This outcome reflects financial integration theory, which argues that global markets are becoming increasingly interconnected, allowing shocks in one sector to rapidly influence others.

Additional studies, such as Shahzad et al. (2021), show spillover effects within the cryptocurrency ecosystem itself, particularly during the COVID-19 crisis. Qiao et al. (2023) further demonstrate that the transmission of volatility among cryptocurrencies, DeFi assets, and NFTs suggests growing integration across digital financial markets. Likewise, Antonakakis et al. (2020) provided evidence of spillovers between oil markets and other financial asset classes, further reinforcing the financial integration framework.

Most prior research has concentrated on examining the linkages between cryptocurrencies and financial markets or currencies in advanced economies (Kliber et al. 2019; Shahzad et al. 2020; Zang et al. 2018). Only a limited number of studies (Kumah and Odei-Mensah 2021) have turned their attention to Africa. From the evidence available, none have exclusively focused on Sub-Saharan Africa (SSA), despite the region’s growing engagement with cryptocurrencies. Ndemo (2022), writing for the Brookings Institution and referencing Chinese analyses, highlighted that SSA received approximately USD 105.6 billion in cryptocurrency transactions between July 2020 and June 2021—an increase of about 1,200%. This surge aligns with KuCoin’s projection that cryptocurrency use in Africa could grow by roughly 2,670% in 2022 (Hall 2022). Other reports further show that Africa leads globally in terms of cryptocurrency adoption (Hall 2022; Joseph et al. 2022). Likewise, Africa’s financial markets remain closely connected with both advanced and emerging market equities, implying that shocks originating in the cryptocurrency market could spread directly into African markets or indirectly through international financial systems (Hall 2022; Kumah and Odei-Mensah 2021). Kumah and Odei-Mensah (2021) further demonstrated moderate but increasing linkages between Africa’s financial system and cryptocurrencies at medium-frequency intervals, while showing near-perfect integration at low-frequency levels. These findings underline the need for further studies to clarify the depth and transmission channels of this relationship.

This study therefore seeks to explore whether cryptocurrencies and SSA’s financial markets are interconnected and to measure both the degree of integration and potential spillover effects. Our contribution to existing research lies in applying the dynamic conditional correlation generalized autoregressive conditional heteroskedasticity (DCC-GARCH) model as well as the Baba–Engle–Kraft–Kroner (BEKK) framework, which is a refined version of Bollerslev’s (1986) GARCH approach. This methodology enables us to assess the extent of spillovers between cryptocurrency markets and traditional financial markets in the five largest economies in Africa.

Our results reveal a notable but limited spillover from cryptocurrencies to African equity markets. We also detect a weak, though gradually strengthening, positive correlation between the two markets. This suggests that in the long run, investors might view cryptocurrencies both as a hedging tool and as a diversification avenue alongside traditional equities. The remainder of this paper is organized as follows: Section 2 reviews the related literature; Section 3 describes the dataset and analytical methods; Section 4 presents and interprets the findings; and Section 5 concludes with implications for policy and practice.

The academic debate on whether cryptocurrency should be classified as money, a commodity, or a financial instrument has persisted for years. If the definition of “money” requires issuance by a sovereign authority, then categorizing cryptocurrency as money becomes challenging. However, if we focus on the functional aspects of money—such as being a store of value, a medium of exchange, a unit of account, and a standard for deferred payment—cryptocurrency is not fundamentally different from traditional fiat currency (Wolla 2018; Levulytė and Šapkauskie 2021; Kinateder and Choudhury 2022). Some scholars argue that cryptocurrency qualifies as a currency and can serve as an alternative to fiat money (Levulytė and Šapkauskie 2021; Fang et al. 2022). At the same time, others compare it to commodities like gold since its value largely depends on supply and demand dynamics (Bouri et al. 2020).

For an asset to be considered money, it must be widely accepted and used in transactions; yet, as Carrick (2016) observed, the exact degree of settlement required for an asset to attain monetary status is ambiguous. Levulytė and Šapkauskie (2021) further emphasized that the number of settlement points should be sufficiently extensive for an asset to function as a medium of exchange. For instance, Bitcoin has witnessed growing adoption and utilization in El Salvador (Gupta et al. 2020; Joseph et al. 2022).

Scholars have also highlighted that cryptocurrency would need broader global acceptance as a means of exchange before it could be fully regarded as money (Wolla 2018; Jareño et al. 2020). Whether it is categorized as money or a financial instrument, Joseph et al. (2022) argued that cryptocurrency is best understood as a financial instrument, since money itself is essentially a highly liquid financial asset.

Evidence suggests that regulatory treatment of cryptocurrency varies across countries. For example, in El Salvador and Japan, cryptocurrency is recognized as money, albeit in different contexts. In contrast, Australia treats cryptocurrency more like a commodity, regulating it through capital market frameworks. Similarly, countries such as the USA, Germany, and Canada—where cryptocurrency adoption is relatively high—classify it as a financial instrument, which may function either as money or as a commodity depending on the nature and purpose of the transaction (Levulytė and Šapkauskie 2021; Joseph et al. 2022).