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Bitcoin and cryptocurrency marketplaces present tremendous legal. The market shares and market capitalizations of a number of cryptocurrencies have fluctuated drastically on cryptocurrency exchanges, which have also been quite volatile (White, 2014). Although previously dominated by other fields, the economic and financial literature on Bitcoin and cryptocurrencies has just begun to appear. Several recent econophysics publications have furthermore focused on cryptocurrencies. Due to their reliance on self-fulfilling expectations and the absence of a centralized governing body, bitcoin markets may be particularly susceptible to econophysics methodologies, without overstating their significance.

Methods with point reference

The purpose of this study is to demonstrate the use of econophysics tools and methodologies via a new application to the two main cryptocurrency marketplaces. Fivefold is the significance of our participation. First, we construct an econophysics model for bubbles and collapses that can be fitted to real financial data using traditional statistical methods such as maximum likelihood estimation. While our concept is relevant to general financial markets, it may have particular significance to cryptocurrency markets.

Second, we add to the nascent scholarly literature on Bitcoin and cryptocurrency markets.

Thirdly, we discover empirical evidence of negative bubbles in cryptocurrency markets, which complements previously recorded evidence of speculative bubbles.

And the last point

Fourthly, we examine the question of competitor cryptocurrency rivalry. This is essential because the problem of contagion and interdependence is especially relevant to cryptocurrency markets. In recent months, the market share of Bitcoin and Ripple, the two major cryptocurrencies, has varied considerably. Here, we uncover proof of ripple’s influence on Bitcoin. Fifthly, we construct a model to independently validate the effect of putative market shocks (recognised by both academics and practitioners) on Bitcoin. The findings indicate that bitcoin markets are intrinsically complicated and often misunderstood by academics and industry professionals.

Some more explanation

This paper is organised as follows. The second section provides a short explanation of econophysics and a literature assessment on Bitcoin and cryptocurrencies. The fundamental bubble/antibubble model and its extension to higher dimensions are developed in Section 3. In Section 4, a model for unanticipated market shocks is discussed. The model is subsequently used to monitor the impact of events such as the shutdown of the illicit Silk Road website and the failure of the Tokyo-based Bitcoin exchange Mt. Gox on Bitcoin prices. In Section 5, empirical applications are examined. Section 6 finishes.

Section excerpts

Econophysics is arguably best characterised as the modelling of financial and economic systems using concepts and methods from theoretical and statistical physics (Mantegna & Stanley, 1999). The movement has a lengthy history. For historical context, see, for instance, Jovanovic and Schinckus (2013) and Chen and Li (2012). The term econophysics was created by Stanley et al. (1996), and the present branch of the movement may be traced back to many significant breakthroughs in the 1990s. These consist of

Negative bubbles and univariate bubbles

Let Pt represent the asset’s price at time t, and let Xt equal the log of Pt. In accordance with Johansen et al. (2000), we begin with the equation P1(t) = Wt + j(t), where Wt is a Wiener process and j(t) is a jump process.

When a crash happens, % is automatically subtracted from the asset’s value. Prior to a crash, P(t) = P1(t), and Itô’s formula dictates that Xt = log (P(t)) meets the condition where v = – ln [(1 – )] > 0.

Unanticipated market fluctuations

Suppose the market is vulnerable to an unforeseeable shock. It is considered that the time of the shock is absolutely unexpected. If the shock is exogenous, then its effects are just temporary (Sornette & Helmstetter, 2003). In contrast, the aftereffects of an endogenous shock have the potential to be far longer lasting.

The shock happens at time 0 and causes an initial reduction in drift by 0 and an initial rise in volatility by 02. As an arbitrage possibility

Negative and positive bubbles

As the global cryptocurrency economy is still in its infancy, it is an interesting area of research, particularly for econophysics. The authoritative website coinmarketcap.com provides easy access to data pertaining to market capitalization and market share. Specifically, market share and market capitalization have fluctuated significantly over the last several years, as White (2014) explains. This is particularly true for Bitcoin, whose market share has increased.

Conclusions

Due to extensive media coverage, cryptocurrencies have garnered considerable public interest (Frisby, D., 2014, Vigna, P. and Casey, M., 2015). From an economic standpoint, the monetary amounts involved are enormous. In the last several years, the market capitalization and market share of a number of cryptocurrencies, including Bitcoin, have fluctuated dramatically. In this context, the academic literature on cryptocurrencies has started to develop with an explosion of economics and finance research.

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