Journal of Network Theory in Finance

Risk.net

Universalities in the dynamics of cryptocurrencies: stability, scaling and size

Andrey Pogudin, Anindya S. Chakrabati and Tiziana Di Matteo

• Cryptocurrency markets exhibit demand-driven fluctuation coupled with instabilities arising out of high default rates.

• Such currencies exhibit scaling behavior in volatilities in low frequency sampling with respect to market size.

• Central currencies in return and volatility networks tend to correlate with market size.

• The relationship between latent volatility of the currencies and their relative size in the market is time-varying and it weakens during times of crisis.

Cryptocurrencies represent an asset class featuring two unique properties: they are not backed by sovereigns, and their supply is fixed exogenously. This combination becomes apparent in their volatility, which is driven only by demand-side factors. In particular, cryptocurrencies represent an extreme case of the excess volatility puzzle, with asset prices moving more than the fundamentals. We explore the effects of market capitalization on the dynamics of cryptocurrencies within both returns and volatility networks and show that these cryptocurrencies exhibit scaling properties in volatility with respect to market capitalization. The dependency network suggests that currencies with a larger market share have a larger presence in the dominant eigenspectrum, and they exert more influence in the comovement network. In these regards, we find parallels between the dynamics of cryptocurrencies and those of more traditional asset classes. Our findings have implications for both researchers and practitioners in terms of modeling and analyzing the collective behavior of financial assets.

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