The rapid integration of crypto assets into global financial markets has intensified debates around their risk-return characteristics and their interaction with traditional asset classes. Unlike equities, bonds, or commodities, cryptocurrencies exhibit extreme volatility, structural breaks, and regime-dependent behaviors, complicating portfolio allocation decisions. Understanding how these digital assets co-move with traditional portfolios across different market states whether tranquil or turbulent is essential for assessing their role as speculative instruments, diversifiers, or hedging tools. This article investigates the dynamic interactions between crypto assets and traditional portfolios using regime-switching volatility models that capture nonlinear patterns and sudden shifts in correlation structures. By testing contagion effects during periods of stress, the study evaluates whether cryptocurrencies amplify systemic risk or instead offer hedging benefits when conventional assets falter. Particular attention is given to the asymmetry of linkages: while in stable market regimes, crypto assets may appear weakly correlated, episodes of turbulence often reveal stronger co-movements suggestive of contagion. The analysis further examines hedging effectiveness, employing time-varying strategies that consider both volatility clustering and correlation shifts. Results highlight that hedging performance is highly state-dependent: in normal regimes, certain cryptocurrencies can reduce portfolio risk, whereas in crisis regimes their hedging role deteriorates, reflecting speculative herding and liquidity constraints. Overall, the findings underscore the necessity of regime-sensitive frameworks for investors and policymakers. They suggest that simplistic correlation-based diversification arguments are insufficient and that a deeper understanding of nonlinear dependencies is required to properly integrate crypto assets into risk management and strategic asset allocation.