One size does not fit all: external driver of the cryptocurrency world

Abstract

Purpose

Considering the different motivation for the creation of each of these cryptocurrencies, the purpose of this paper is to examine whether there is a dominant external factor in the cryptocurrency world. Using a novel two-step time and frequency independent methodology, the authors examine a large scope of cryptocurrencies and external factors within the same period, and analytical framework.

Design/methodology/approach

The examined cryptocurrencies are Bitcoin, Ethereum, Ripple, Litecoin, Monero and Dash. In total, 18 external factors from 5 factor families are selected based on the mining motivation of these cryptocurrencies. The study first examines discrete wavelet transform-based (WTB) correlations, reduce the dimension and focuson relevant pairs. Selected pairs are further examined by wavelet coherence to capture the intermittent nature of the relationships allowing the most needed “Flexibility of frequency and time domains”.

Findings

Each coin appears to operate as a unique character with the exception of Bitcoin and Litecoin. There is no prominent external driver. The cryptocurrency market is not a clear substitute for a specific factor or market. Two-step WTB filtered wavelet coherence analysis help us to analyze a large number of factor without the loss of focus. The co-movements within the cryptocurrencies spillover from Ethereum to altcoins and later to Bitcoin.

Originality/value

The study presents one of the first examples of two-step WTB filtered wavelet coherence analysis. The methodology suggests an approach for simultaneous examination of large number of variables. The scope of the study provides a rather holistic view of the co-movements of external factors and major cryptocurrencies.

Citation

Erzurumlu, Y.O., Oygur, T. and Kirik, A. (2020), "One size does not fit all: external driver of the cryptocurrency world", Studies in Economics and Finance, Vol. 37 No. 3, pp. 545-560. https://doi.org/10.1108/SEF-01-2020-0018