Using statistical tools designed to measure how shocks transmit between volatile assets, the researchers quantified exactly how much a Bitcoin price swing affected each country’s primary stock index. The models produce parameters that capture the strength and persistence of these spillover effects.

The expectation was straightforward: if domestic investors can’t trade Bitcoin, domestic stock markets shouldn’t react much when Bitcoin crashes or rallies. The data showed otherwise, which is part of the reason why central banks are increasingly studying Bitcoin.

Across the nine countries with restrictions, there was no systematic reduction in these spillover measures. The correlation between Bitcoin and local equities persisted regardless of regulatory stance. In some smaller markets, the correlations actually increased after implementing bans.

The Workaround Problem

One explanation is simple: bans don’t actually prevent exposure. VPNs allow traders to access offshore exchanges. Peer-to-peer networks operate beneath the regulatory radar. Crypto-friendly neighboring jurisdictions provide convenient workarounds. The underground economy adapts faster than enforcement mechanisms can keep pace.

This would mean that restrictive countries maintain all the volatility linkages of permissive ones, but with the added dysfunction of driving activity into unregulated channels where investor protections don’t exist and tax collection fails.

But there’s a more fundamental problem with the entire premise of using bans to insulate markets.

The Global Macro Connection

Both Bitcoin and equity markets respond to the same underlying forces: Federal Reserve policy signals, dollar strength, and shifting risk appetite. When the Fed hints at rate cuts, both stocks and crypto tend to rally. When inflation data surprises to the upside and rate expectations adjust, both sell off.

This creates correlations that have nothing to do with domestic Bitcoin trading. If the linkage stems from shared sensitivity to global macro conditions rather than direct transmission of crypto-specific shocks, then banning Bitcoin domestically becomes pointless. You can’t insulate your stock market from Bitcoin volatility by restricting Bitcoin if the correlation runs through a third factor neither ban addresses.

The study attempted to control for this using the VIX volatility index, but the results were inconclusive. The fundamental challenge remains: disentangling whether observed correlations reflect actual transmission of Bitcoin shocks to equities, or merely parallel responses to common drivers.

Either way, the policy implication is the same. Bans don’t achieve the insulation regulators seek.

What Happened In China

Even the world’s most comprehensive crypto crackdown only partially reduced spillovers. China banned crypto exchanges in 2017, prohibited initial coin offerings, and in 2021 declared all crypto transactions illegal. The country deployed enormous state capacity to enforce these restrictions.

The research shows China did achieve some reduction in the Bitcoin-stock market correlation. But it remained present. And the cost was pushing an entire industry offshore while domestic traders continued participating through foreign platforms.

Russia showed a similar pattern: extensive restrictions yielding modest reductions in measured spillovers, but far from the complete insulation the policy aimed for.

Smaller economies fared worse. Several countries saw spillover measures increase after implementing bans, possibly because the restrictions triggered capital flight or heightened attention to global crypto markets as forbidden fruit.

The Limits Of Financial Nationalism

The failure of Bitcoin bans to insulate domestic markets reflects a broader reality: financial nationalism doesn’t work when capital is globally mobile and assets are digitally tradable. You can ban an exchange, or banks from touching Bitcoin, but you can’t ban an algorithm. You can prohibit domestic banks from servicing crypto firms, but you can’t prevent citizens from accessing global platforms.

This matters because multiple countries continue pursuing restrictive approaches. Pakistan recently tightened crypto regulations. Nigeria maintains a contentious relationship with crypto trading despite widespread adoption. India has oscillated between outright hostility and grudging tolerance.

The research suggests these efforts won’t achieve their stated goal of protecting domestic financial stability from crypto volatility. The correlations will persist either because workarounds maintain actual exposure, or because both asset classes respond to the same global macro environment.

The Institutional Adoption Context

The challenge for restrictive regulators grows harder as traditional finance embraces crypto. Bitcoin ETFs have launched in the United States, bringing crypto exposure to mainstream portfolios. Major banks now offer custody services. Pension funds are allocating to digital assets.

This institutional adoption creates legitimate channels for correlation. Even if a country bans retail Bitcoin trading, its stock market includes companies with crypto exposure, institutional investors with global portfolios, and businesses affected by the same macro factors that drive crypto prices.

Attempting to maintain separate financial spheres becomes less viable when the spheres have already merged at the institutional level.

The policy lesson is uncomfortable: if you want to reduce your stock market’s sensitivity to the “animal spirits” of Bitcoin volatility, you need coordinated global action on the underlying macro drivers, not unilateral national restrictions. And coordinating global monetary policy is considerably harder than banning a domestic exchange.