Persistence in Cryptocurrencies Saturday, 30 December, 2017

Cryptocurrencies are at the moment very popular, therefore we decided to point on a short research paper showing interesting cryptos' characteristic - persistence:

Authors: Caporale, Gil-Alana, Plastun

Title: Persistence in the Cryptocurrency Market

Link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3084023

Abstract:

This paper examines persistence in the cryptocurrency market. Two different longmemory methods (R/S analysis and fractional integration) are used to analyse it in the case of the four main cryptocurrencies (BitCoin, LiteCoin, Ripple, Dash) over the sample period 2013-2017. The findings indicate that this market exhibits persistence (there is a positive correlation between its past and future values), and that its degree changes over time. Such predictability represents evidence of market inefficiency: trend trading strategies can be used to generate abnormal profits in the cryptocurrency market.

Notable quotations from the academic research paper:

"One of the key issues yet to be analysed is whether the dynamic behaviour of cryptocurrencies is predictable, which would be inconsistent with the Efficient Market Hypothesis. Long-memory techniques can be applied for this purpose.

The present study carries out a more comprehensive analysis by considering four main cryptocurrencies (the most liquid ones: BitCoin, LiteCoin, Ripple, Dash) and applying two different long-memory methods (R/S analysis and fractional integration) over the period 2013-2017 to investigate their stochastic properties. Moreover, it also examines the evolution of persistence over time (by looking at changes in the Hurst exponent). Any predictable patterns could of course be used as a basis for trading strategies aimed at making abnormal profits in the cryptocurrency market.

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As can be seen, the series do not follow a random walk, and are persistent, which is inconsistent with market efficiency. The most efficient cryptocurrency is Bitcoin, which is the oldest and most commonly used, as well as the most liquid. Degree of persistence varies over the time, and fluctuates around its average.

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