Comovement and Instability in Cryptocurrency Markets

Abstract

We analyze the extent of comovement between daily price returns of nine major cryptocurrencies
from April 2013 to February 2021. We assess its evolution using bivariate and multivariate modelling approaches, and detect pronounced time variation. Generally, comovement is initially low and positive, but increases substantially between early 2017 and late 2018 and stays high until the end of the sample. We then adopt a right-tail version of the Augmented Dickey-Fuller unit root test to identify periods of mildly explosive behavior (statistical instability) in the Network Value to Transactions (NVT) ratio of seven cryptocurrencies. The NVT ratio is a novel measure of the dollar value of cryptocurrency transaction activity relative to network value. We show evidence of significant mild explosiveness in all seven cryptocurrencies. In 2018 and in the second half of 2019, several cryptocurrencies experience often simultaneous instability. Instability is a dominant feature of these markets.

Keywords: Asset Pricing, Cryptocurrencies, Comovement, NVT Ratio, Mild Explosiveness

JEL Classification: C58, G1, G10, G11, G12