Crisis-driven Dynamics: Unveiling the Volatility Nexus Between Clean and Dirty Cryptocurrencies

This study examines the dynamic volatility spillovers and portfolio implications of clean and dirty cryptocurrencies (DCs) over recent crisis periods, employing a two-stage approach. First, we model the evolving connectedness structure using a time-varying parameter vector autoregression (TVP-VAR) framework. Second, we assess portfolio performance through back testing four strategies, namely minimum variance portfolio (MVP), minimum correlation portfolio (MCP), minimum connectedness and risk parity, focusing on hedging effectiveness (HE) and dynamic Sharpe ratios (SRs). The analysis covers the period from 16 September 2022 to 27 February 2025, a time marked by heightened market volatility and uncertainty. Our findings reveal that clean cryptocurrencies (CCs) such as Binance Coin (BNB), Ethereum (ETH) and Cardano consistently enhance portfolio diversification, risk mitigation and stability compared to traditional dirty assets like Bitcoin (BTC), Monero and Dash. Robustness checks across alternative asset combinations confirm the consistency of these results. These insights highlight the strategic value of integrating clean digital assets to achieve both financial resilience and sustainable investment objectives in the evolving cryptocurrency market.