Universalities in the Dynamics of Cryptocurrencies: Stability, Scaling and Size
34 Pages Posted: 19 Jan 2021
Date Written: February 8, 2020
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 co movement 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.
Keywords: cryptocurrency, Bitcoin, blockchain, network, volatility, stability, scaling
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