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Signatures of Maturity in Cryptocurrency Market

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A special issue of Entropy (ISSN 1099-4300). This special issue belongs to the section "Complexity".

Deadline for manuscript submissions: closed (19 March 2023) | Viewed by 38114

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Special Issue Editors

Prof. Dr. Stanisław Drożdż

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Guest Editor

1. Complex Systems Theory Department, Institute of Nuclear Physics, Polish Academy of Sciences, 31-342 Kraków, Poland
2. Faculty of Computer Science and Telecommunications, Cracow University of Technology, 31-155 Kraków, Poland
Interests: complex systems; nuclear physics; quantum mechanics; multifractals; complex networks; nonlinear dynamics; deterministic chaos; random matrix theory; econophysics; quantitative linguistics
Special Issues, Collections and Topics in MDPI journals

Dr. Jarosław Kwapień

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Guest Editor

Complex Systems Theory Department, Institute of Nuclear Physics, Polish Academy of Sciences, 31-342 Kraków, Poland
Interests: complex systems; complex networks; financial markets; natural language; fractal analysis
Special Issues, Collections and Topics in MDPI journals

Dr. Marcin Wątorek

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Guest Editor

Faculty of Computer Science and Telecommunications, Cracow University of Technology, ul. Warszawska 24, 31-155 Kraków, Poland
Interests: complex systems; financial markets; cryptocurrencies; speculative bubbles; multiscale methods

Special Issue Information

Dear Colleagues,

It has only been a dozen years since the introduction of the first cryptocurrency - bitcoin - and there are already several thousand available instruments based on the blockchain technology. The cryptocurrency market has already gone a long route from a mere curiosity and a playground for the technology enthusiasts to a significant place where hundreds of billions of US dollars are actively traded daily. This spectacular development offers a unique possibility for researchers to investigate a complete process of a financial market self-organization from scratch to a relatively grown-up form without any central governing body. For the most up to date related review see the recent "Multiscale characteristics of the emerging global cryptocurrency market" in Physics Reports 901 (2021) 1–82; https://doi.org/10.1016/j.physrep.2020.10.005.

Currency recalls money and money emerges spontaneously in an act of the symmetry of goods breaking, which can obviously happen also in future with some cryptocurrency. A question arises whether a cryptocurrency can be considered a commonly accepted means of exchange. First, it will require that the market reaches maturity. Indeed, there is growing evidence that it continuously advances on a route to such a stage, but, actually, how far from maturity is it in terms of market efficiency, liquidity, stability, and dynamical complexity? The problem is still open and we welcome both the arguments in favour of the market maturity and the arguments against it.

We invite researchers representing different disciplines – econophysicists, economists, mathematicians, data scientists, and others – to submit their original papers reporting studies of the cryptocurrency market and/or individual cryptocurrencies. The papers may cover a broad spectrum of topics not necessarily discussing the maturity issue per se: from the quantitative analyses and modelling of the statistical properties of the market data, price dynamics, asset liquidity, the asset-asset correlations, information transfer, market efficiency, stability, hedging opportunities, and the market response to internal and external shocks, to the studies of the market microstructure, the studies investigating how the technological differences among the cryptocurrencies (e.g., different mining protocols) affect their statistical properties and dynamics, as well as many topics unlisted here. As any other financial market, the cryptocurrency market is a complex system that can be studied with many methods developed in the fields of statistical physics, agent-based modeling, information theory, time series analysis and complexity theory. We particularly welcome contributions reporting the analyses of high-frequency data and the application of some advanced methods of data analysis, including the multiscaling, networks, and nonextensive entropy approaches.

Prof. Dr. Stanisław Drożdż
Dr. Jarosław Kwapień
Dr. Marcin Wątorek
Guest Editors

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Keywords

cryptocurrencies
complexity measures
complex networks
time series analysis
agent-based models
multiscaling
cross-correlations
information transfer
nonextensive entropy
market efficiency
hedging opportunities

Published Papers (13 papers)

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Research

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15 pages, 1261 KiB

Open AccessArticle

Collective Dynamics, Diversification and Optimal Portfolio Construction for Cryptocurrencies

by Nick James and Max Menzies

Entropy 2023, 25(6), 931; https://doi.org/10.3390/e25060931 - 13 Jun 2023

Cited by 6 | Viewed by 1207

Abstract

Since its conception, the cryptocurrency market has been frequently described as an immature market, characterized by significant swings in volatility and occasionally described as lacking rhyme or reason. There has been great speculation as to what role it plays in a diversified portfolio. For instance, is cryptocurrency exposure an inflationary hedge or a speculative investment that follows broad market sentiment with amplified beta? We have recently explored similar questions with a clear focus on the equity market. There, our research revealed several noteworthy dynamics such as an increase in the market’s collective strength and uniformity during crises, greater diversification benefits across equity sectors (rather than within them), and the existence of a “best value” portfolio of equities. In essence, we can now contrast any potential signatures of maturity we identify in the cryptocurrency market and contrast these with the substantially larger, older and better-established equity market. This paper aims to investigate whether the cryptocurrency market has recently exhibited similar mathematical properties as the equity market. Instead of relying on traditional portfolio theory, which is grounded in the financial dynamics of equity securities, we adjust our experimental focus to capture the presumed behavioral purchasing patterns of retail cryptocurrency investors. Our focus is on collective dynamics and portfolio diversification in the cryptocurrency market, and examining whether previously established results in the equity market hold in the cryptocurrency market and to what extent. The results reveal nuanced signatures of maturity related to the equity market, including the fact that correlations collectively spike around exchange collapses, and identify an ideal portfolio size and spread across different groups of cryptocurrencies. Full article

(This article belongs to the Special Issue Signatures of Maturity in Cryptocurrency Market)

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23 pages, 5464 KiB

Open AccessFeature PaperArticle

What Is Mature and What Is Still Emerging in the Cryptocurrency Market?

by Stanisław Drożdż, Jarosław Kwapień and Marcin Wątorek

Entropy 2023, 25(5), 772; https://doi.org/10.3390/e25050772 - 09 May 2023

Cited by 9 | Viewed by 1906

Abstract

In relation to the traditional financial markets, the cryptocurrency market is a recent invention and the trading dynamics of all its components are readily recorded and stored. This fact opens up a unique opportunity to follow the multidimensional trajectory of its development since inception up to the present time. Several main characteristics commonly recognized as financial stylized facts of mature markets were quantitatively studied here. In particular, it is shown that the return distributions, volatility clustering effects, and even temporal multifractal correlations for a few highest-capitalization cryptocurrencies largely follow those of the well-established financial markets. The smaller cryptocurrencies are somewhat deficient in this regard, however. They are also not as highly cross-correlated among themselves and with other financial markets as the large cryptocurrencies. Quite generally, the volume V impact on price changes R appears to be much stronger on the cryptocurrency market than in the mature stock markets, and scales as

R (V) \sim V^{α}

with

α ≳ 1

. Full article

(This article belongs to the Special Issue Signatures of Maturity in Cryptocurrency Market)

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16 pages, 4826 KiB

Open AccessArticle

Cryptocurrencies Are Becoming Part of the World Global Financial Market

by Marcin Wątorek, Jarosław Kwapień and Stanisław Drożdż

Entropy 2023, 25(2), 377; https://doi.org/10.3390/e25020377 - 18 Feb 2023

Cited by 16 | Viewed by 3564

Abstract

In this study the cross-correlations between the cryptocurrency market represented by the two most liquid and highest-capitalized cryptocurrencies: bitcoin and ethereum, on the one side, and the instruments representing the traditional financial markets: stock indices, Forex, commodities, on the other side, are measured in the period: January 2020–October 2022. Our purpose is to address the question whether the cryptocurrency market still preserves its autonomy with respect to the traditional financial markets or it has already aligned with them in expense of its independence. We are motivated by the fact that some previous related studies gave mixed results. By calculating the q-dependent detrended cross-correlation coefficient based on the high frequency 10 s data in the rolling window, the dependence on various time scales, different fluctuation magnitudes, and different market periods are examined. There is a strong indication that the dynamics of the bitcoin and ethereum price changes since the March 2020 COVID-19 panic is no longer independent. Instead, it is related to the dynamics of the traditional financial markets, which is especially evident now in 2022, when the bitcoin and ethereum coupling to the US tech stocks is observed during the market bear phase. It is also worth emphasizing that the cryptocurrencies have begun to react to the economic data such as the Consumer Price Index readings in a similar way as traditional instruments. Such a spontaneous coupling of the so far independent degrees of freedom can be interpreted as a kind of phase transition that resembles the collective phenomena typical for the complex systems. Our results indicate that the cryptocurrencies cannot be considered as a safe haven for the financial investments. Full article

(This article belongs to the Special Issue Signatures of Maturity in Cryptocurrency Market)

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19 pages, 1323 KiB

Open AccessArticle

Investigating Dynamical Complexity and Fractal Characteristics of Bitcoin/US Dollar and Euro/US Dollar Exchange Rates around the COVID-19 Outbreak

by Pavlos I. Zitis, Shinji Kakinaka, Ken Umeno, Michael P. Hanias, Stavros G. Stavrinides and Stelios M. Potirakis

Entropy 2023, 25(2), 214; https://doi.org/10.3390/e25020214 - 22 Jan 2023

Cited by 2 | Viewed by 2465

Abstract

This article investigates the dynamical complexity and fractal characteristics changes of the Bitcoin/US dollar (BTC/USD) and Euro/US dollar (EUR/USD) returns in the period before and after the outbreak of the COVID-19 pandemic. More specifically, we applied the asymmetric multifractal detrended fluctuation analysis (A-MF-DFA) method to investigate the temporal evolution of the asymmetric multifractal spectrum parameters. In addition, we examined the temporal evolution of Fuzzy entropy, non-extensive Tsallis entropy, Shannon entropy, and Fisher information. Our research was motivated to contribute to the comprehension of the pandemic’s impact and the possible changes it caused in two currencies that play a key role in the modern financial system. Our results revealed that for the overall trend both before and after the outbreak of the pandemic, the BTC/USD returns exhibited persistent behavior while the EUR/USD returns exhibited anti-persistent behavior. Additionally, after the outbreak of COVID-19, there was an increase in the degree of multifractality, a dominance of large fluctuations, as well as a sharp decrease of the complexity (i.e., increase of the order and information content and decrease of randomness) of both BTC/USD and EUR/USD returns. The World Health Organization (

W H O

) announcement, in which COVID-19 was declared a global pandemic, appears to have had a significant impact on the sudden change in complexity. Our findings can help both investors and risk managers, as well as policymakers, to formulate a comprehensive response to the occurrence of such external events. Full article

(This article belongs to the Special Issue Signatures of Maturity in Cryptocurrency Market)

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16 pages, 438 KiB

Open AccessArticle

Oracles in Decentralized Finance: Attack Costs, Profits and Mitigation Measures

by Ayana T. Aspembitova and Michael A. Bentley

Entropy 2023, 25(1), 60; https://doi.org/10.3390/e25010060 - 28 Dec 2022

Cited by 3 | Viewed by 1682

Abstract

Decentralized finance (DeFi) is by far the most popular application of blockchain technology. Despite the wide acceptance of new financial instruments and services, there are still many unexplored areas in the field. We dedicate this research to the understanding of one of the most crucial limitations of decentralized finance—oracles. DeFi protocols, as well as other blockchain applications, function in a closed environment and regularly need to fetch real-world information (e.g., assets’ prices)—the tool used for this purpose is called an oracle. We review the existing oracle types in DeFi applications and focus our research on the least explored one: when another protocol, typically a decentralized exchange, serves as a price oracle. After explaining the mechanisms behind the decentralized exchanges, we introduce an algorithmic model that allows one to safely design a decentralized oracle and adjust crucial parameters. We believe that understanding and implementing the logic presented in the model can help to reduce the chances of price manipulations attacks, which are the most frequent incident types in DeFi. Full article

(This article belongs to the Special Issue Signatures of Maturity in Cryptocurrency Market)

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19 pages, 2072 KiB

Open AccessArticle

An Edge-Supported Blockchain-Based Secure Authentication Method and a Cryptocurrency-Based Billing System for P2P Charging of Electric Vehicles

by A. F. M. Suaib Akhter, Tawsif Zaman Arnob, Ekra Binta Noor, Selman Hizal and Al-Sakib Khan Pathan

Entropy 2022, 24(11), 1644; https://doi.org/10.3390/e24111644 - 12 Nov 2022

Cited by 2 | Viewed by 2427

Abstract

The popularity of electric vehicles (EVs) is constantly increasing, as they use relatively greener, sustainable energy. However, it is a fact that the charging stations for EVs are yet to meet the demand. It could be a great solution if a peer-to-peer (P2P) charging system could be initiated by anyone who wants to make their garage’s charge points publicly available for commercial purposes, named a home charging station (HCS). In this work, our idea is to bring interested charging stations under a network of nodes and a blockchain-based management system, where the blockchain is responsible for ensuring the authenticity of both the charging stations and charge receiver. A cryptocurrency-based payment system has also been proposed to ensure transactions’ security, integrity, transparency, and immutability. A reputation management system is applied to maintain the quality of service. Miners with high processing power are used to alleviate lagging during block creation, supported by edge servers. The proposed system has been implemented by using virtual machines. A theoretical analysis is presented to assess the compatibility and possible cost requirements to implement the system in a real-world scenario. Full article

(This article belongs to the Special Issue Signatures of Maturity in Cryptocurrency Market)

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14 pages, 7087 KiB

Open AccessArticle

Observing Cryptocurrencies through Robust Anomaly Scores

by Geumil Bae and Jang Ho Kim

Entropy 2022, 24(11), 1643; https://doi.org/10.3390/e24111643 - 11 Nov 2022

Cited by 2 | Viewed by 1286

Abstract

The cryptocurrency market is understood as being more volatile than traditional asset classes. Therefore, modeling the volatility of cryptocurrencies is important for making investment decisions. However, large swings in the market might be normal for cryptocurrencies due to their inherent volatility. Deviations, along with correlations of asset returns, must be considered for measuring the degree of market anomaly. This paper demonstrates the use of robust Mahalanobis distances based on shrinkage estimators and minimum covariance determinant for observing anomaly scores of cryptocurrencies. Our analysis shows that anomaly scores are a critical complement to volatility measures for understanding the cryptocurrency market. The use of anomaly scores is further demonstrated through portfolio optimization and scenario analysis. Full article

(This article belongs to the Special Issue Signatures of Maturity in Cryptocurrency Market)

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21 pages, 1165 KiB

Open AccessArticle

Dynamic Linkage between Bitcoin and Traditional Financial Assets: A Comparative Analysis of Different Time Frequencies

by Panpan Wang, Xiaoxing Liu and Sixu Wu

Entropy 2022, 24(11), 1565; https://doi.org/10.3390/e24111565 - 30 Oct 2022

Cited by 13 | Viewed by 4643

Abstract

This study employs the ADCC-GARCH approach to investigate the dynamic correlation between bitcoin and 14 major financial assets in different time-frequency dimensions over the period 2013–2021, for which the risk diversification, hedging and safe-haven properties of bitcoin for those traditional assets are further examined. The results show that, first, bitcoin is positively linked to risk assets, including stock, bond and commodity, and negatively linked to the U.S. dollar, which is a safe-haven asset, so bitcoin is closer in nature to a risk asset than a safe-haven asset. Second, the high short-term volatility and speculative nature of the bitcoin market makes its long-term correlation with other assets stronger than the short-term. Third, the positive linkage between the prices of bitcoin and risk assets increases sharply under extreme shocks (e.g., the outbreak of COVID-19 in early 2020). Fourth, bitcoin can hedge against the U.S. dollar, and in the long term, bitcoin can hedge against the Chinese stock market and act as a safe haven for the U.S. stock market and crude oil. However, for most other traditional assets, bitcoin is only an effective diversifier. Full article

(This article belongs to the Special Issue Signatures of Maturity in Cryptocurrency Market)

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29 pages, 1529 KiB

Open AccessArticle

Predicting Bitcoin (BTC) Price in the Context of Economic Theories: A Machine Learning Approach

by Sahar Erfanian, Yewang Zhou, Amar Razzaq, Azhar Abbas, Asif Ali Safeer and Teng Li

Entropy 2022, 24(10), 1487; https://doi.org/10.3390/e24101487 - 18 Oct 2022

Cited by 7 | Viewed by 3322

Abstract

Bitcoin (BTC)—the first cryptocurrency—is a decentralized network used to make private, anonymous, peer-to-peer transactions worldwide, yet there are numerous issues in its pricing due to its arbitrary nature, thus limiting its use due to skepticism among businesses and households. However, there is a vast scope of machine learning approaches to predict future prices precisely. One of the major problems with previous research on BTC price predictions is that they are primarily empirical research lacking sufficient analytical support to back up the claims. Therefore, this study aims to solve the BTC price prediction problem in the context of both macroeconomic and microeconomic theories by applying new machine learning methods. Previous work, however, shows mixed evidence of the superiority of machine learning over statistical analysis and vice versa, so more research is needed. This paper applies comparative approaches, including ordinary least squares (OLS), Ensemble learning, support vector regression (SVR), and multilayer perceptron (MLP), to investigate whether the macroeconomic, microeconomic, technical, and blockchain indicators based on economic theories predict the BTC price or not. The findings point out that some technical indicators are significant short-run BTC price predictors, thus confirming the validity of technical analysis. Moreover, macroeconomic and blockchain indicators are found to be significant long-term predictors, implying that supply, demand, and cost-based pricing theories are the underlying theories of BTC price prediction. Likewise, SVR is found to be superior to other machine learning and traditional models. This research’s innovation is looking at BTC price prediction through theoretical aspects. The overall findings show that SVR is superior to other machine learning models and traditional models. This paper has several contributions. It can contribute to international finance to be used as a reference for setting asset pricing and improved investment decision-making. It also contributes to the economics of BTC price prediction by introducing its theoretical background. Moreover, as the authors still doubt whether machine learning can beat the traditional methods in BTC price prediction, this research contributes to machine learning configuration and helping developers use it as a benchmark. Full article

(This article belongs to the Special Issue Signatures of Maturity in Cryptocurrency Market)

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28 pages, 1781 KiB

Open AccessFeature PaperArticle

The Cryptocurrency Market in Transition before and after COVID-19: An Opportunity for Investors?

by An Pham Ngoc Nguyen, Tai Tan Mai, Marija Bezbradica and Martin Crane

Entropy 2022, 24(9), 1317; https://doi.org/10.3390/e24091317 - 19 Sep 2022

Cited by 13 | Viewed by 3461

Abstract

We analyze the correlation between different assets in the cryptocurrency market throughout different phases, specifically bearish and bullish periods. Taking advantage of a fine-grained dataset comprising 34 historical cryptocurrency price time series collected tick-by-tick on the HitBTC exchange, we observe the changes in interactions among these cryptocurrencies from two aspects: time and level of granularity. Moreover, the investment decisions of investors during turbulent times caused by the COVID-19 pandemic are assessed by looking at the cryptocurrency community structure using various community detection algorithms. We found that finer-grain time series describes clearer the correlations between cryptocurrencies. Notably, a noise and trend removal scheme is applied to the original correlations thanks to the theory of random matrices and the concept of Market Component, which has never been considered in existing studies in quantitative finance. To this end, we recognized that investment decisions of cryptocurrency traders vary between bearish and bullish markets. The results of our work can help scholars, especially investors, better understand the operation of the cryptocurrency market, thereby building up an appropriate investment strategy suitable to the prevailing certain economic situation. Full article

(This article belongs to the Special Issue Signatures of Maturity in Cryptocurrency Market)

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12 pages, 1175 KiB

Open AccessArticle

Is Bitcoin’s Carbon Footprint Persistent? Multifractal Evidence and Policy Implications

by Bikramaditya Ghosh and Elie Bouri

Entropy 2022, 24(5), 647; https://doi.org/10.3390/e24050647 - 05 May 2022

Cited by 17 | Viewed by 1897

Abstract

The Bitcoin mining process is energy intensive, which can hamper the much-desired ecological balance. Given that the persistence of high levels of energy consumption of Bitcoin could have permanent policy implications, we examine the presence of long memory in the daily data of the Bitcoin Energy Consumption Index (BECI) (BECI upper bound, BECI lower bound, and BECI average) covering the period 25 February 2017 to 25 January 2022. Employing fractionally integrated GARCH (FIGARCH) and multifractal detrended fluctuation analysis (MFDFA) models to estimate the order of fractional integrating parameter and compute the Hurst exponent, which measures long memory, this study shows that distant series observations are strongly autocorrelated and long memory exists in most cases, although mean-reversion is observed at the first difference of the data series. Such evidence for the profound presence of long memory suggests the suitability of applying permanent policies regarding the use of alternate energy for mining; otherwise, transitory policy would quickly become obsolete. We also suggest the replacement of ‘proof-of-work’ with ‘proof-of-space’ or ‘proof-of-stake’, although with a trade-off (possible security breach) to reduce the carbon footprint, the implementation of direct tax on mining volume, or the mandatory use of carbon credits to restrict the environmental damage. Full article

(This article belongs to the Special Issue Signatures of Maturity in Cryptocurrency Market)

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9 pages, 217 KiB

Open AccessArticle

Public-Key Cryptosystems and Bounded Distance Decoding of Linear Codes

by Selda Çalkavur

Entropy 2022, 24(4), 498; https://doi.org/10.3390/e24040498 - 01 Apr 2022

Cited by 3 | Viewed by 1596

Abstract

Error-correcting codes form an important topic in information theory. They are used to correct errors that occur during transmission on a noisy channel. An important method for correcting errors is bounded distance decoding. The public-key cryptosystem is a cryptographic protocol that has two different keys. One of them is a public-key that can be known by everyone, and the other is the private-key only known to the user of the system. The data encrypted with the public-key of a given user can only be decrypted by this user with his or her private-key. In this paper, we propose a public-key cryptosystem based on the error-correcting codes. The decryption is performed by using the bounded distance decoding of the code. For a given code length, dimension, and error-correcting capacity, the new system allows dealing with larger plaintext than other code based public-key cryptosystems. Full article

(This article belongs to the Special Issue Signatures of Maturity in Cryptocurrency Market)

Review

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24 pages, 2378 KiB

Open AccessReview

Blockchain Technology, Cryptocurrency: Entropy-Based Perspective

by Feng Liu, Hao-Yang Fan and Jia-Yin Qi

Entropy 2022, 24(4), 557; https://doi.org/10.3390/e24040557 - 15 Apr 2022

Cited by 14 | Viewed by 5807

Abstract

The large-scale application of blockchain technology is an expected to be an inevitable trend. This study revolves around published papers and articles related to blockchain technology, relevance analysis and sorting through the retrieved documents with six core layers of blockchain: Application Layer, Contract Layer, Actuator Layer, Consensus Layer, Network Layer and Data Layer. Based on the analysis results, this study found that China’s research is more towards the preference and application of landing and industry and smart cities with blockchain as the underlying technology. International research is more focused on the research of finance as the underlying technology of blockchain and tries to combine crypto assets with real industries, such as crypted assets and payment systems for traditional industries. This paper studies the impact of monetary entropy on cryptocurrencies in smart cities and uses the monetary entropy formula to measure the crypto-economic entropy. We use Kolmogorov entropy to describe the degree of chaos in the cryptocurrency market in a smart city. The study illustrates the current status of blockchain technology and applications from the perspective of cryptocurrency in a smart city. We find that smart cities and cryptocurrencies have a mutually reinforcing effect. Full article

(This article belongs to the Special Issue Signatures of Maturity in Cryptocurrency Market)

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