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How Cryptocurrency Age and Market Capitalization Relate to Return Tails

Article arXiv papers · Author: Arthur A. B. Pessa et al.
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Summary

This study examines whether cryptocurrency return extremes vary with an asset’s age and market capitalization. It analyzes more than seven thousand digital currencies, estimating power-law behavior in the tails of their return distributions over the history of the studied portfolio. The reported findings describe asymmetric tails: positive large moves are more likely than negative ones in many assets, and tail exponents often change alongside age, capitalization, or both.

The authors report that the direction of these changes is mixed. Large price variations become less frequent as assets age and grow in market capitalization in only about 28% of the cryptocurrencies examined, so age or size alone does not imply declining extremes. The results offer a broad statistical description rather than a trading rule. The document does not specify sampling, asset inclusion, estimation uncertainty, or out-of-sample tests, which limits conclusions about forecasting or applying the patterns to current markets.

Key ideas

  • The study estimates return-tail behavior across more than seven thousand cryptocurrencies.
  • Tail distributions are reported to follow power laws over the portfolio history.
  • Positive return extremes more often have smaller tail exponents than negative extremes.
  • Tail-exponent changes are commonly associated with asset age, market capitalization, or both.
  • Large moves become less frequent with age and capitalization in only about 28% of the studied assets.

Tags

CryptoStatisticsVolatilityRisk management
Full text
# Age and market capitalization drive large price variations of cryptocurrencies


# Age and market capitalization drive large price variations of cryptocurrencies









Cryptocurrencies are considered the latest innovation in finance with considerable impact across social, technological, and economic dimensions. This new class of financial assets has also motivated a myriad of scientific investigations focused on understanding their statistical properties, such as the distribution of price returns. However, research so far has only considered Bitcoin or at most a few cryptocurrencies, whilst ignoring that price returns might depend on cryptocurrency age or be influenced by market capitalization. Here, we therefore present a comprehensive investigation of large price variations for more than seven thousand digital currencies and explore whether price returns change with the coming-of-age and growth of the cryptocurrency market. We find that tail distributions of price returns follow power-law functions over the entire history of the considered cryptocurrency portfolio, with typical exponents implying the absence of characteristic scales for price variations in about half of them. Moreover, these tail distributions are asymmetric as positive returns more often display smaller exponents, indicating that large positive price variations are more likely than negative ones. Our results further reveal that changes in the tail exponents are very often simultaneously related to cryptocurrency age and market capitalization or only to age, with only a minority of cryptoassets being affected just by market capitalization or neither of the two quantities. Lastly, we find that the trends in power-law exponents usually point to mixed directions, and that large price variations are likely to become less frequent only in about 28\% of the cryptocurrencies as they age and grow in market capitalization.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.