17.10.2018 change 17.10.2018

Physics research: Statistics works for bitcoin

Will bitcoin kick the dollar off the pedestal? Source: Institute of Nuclear Physics PAS Will bitcoin kick the dollar off the pedestal? Source: Institute of Nuclear Physics PAS

Researchers from Krakow looked at the statistics of the bitcoin market. These studies present this famous cryptocurrency in a surprisingly positive light, report representatives of the Institute of Nuclear Physics PAS.

Their research shows that there are no significant differences between the examined basic statistical parameters of the bitcoin market and their counterparts for respected financial markets. The results of the study have been published in Chaos: An Interdisciplinary Journal of Nonlinear Science (https://doi.org/10.1063/1.5036517). The institute representatives summarised the results of their research in a release sent to the PAP.

According to the release, a significant part of credibility of traditional currencies seems to be a psychological artefact resulting from the nature of their evolution. "Subconsciously, we think that if there once was a material good behind money, there is one today. And yet, in terms of physicality, some time ago traditional currencies became what cryptocurrency has been since birth: a bundle of bits in computer`s memory. The actual value of currency is now determined not by what is behind it, but above all by what is happening with this currency - its market" - reads the release.

"When new, emerging financial markets began to shape after the fall of socialism in Central and Eastern Europe, the question about their stability naturally arose. A number of statistical criteria were identified at that time to facilitate the assessment of market maturity.

"We were interested in the results that we would get if we used these criteria to look at the bitcoin market currently valued at hundreds of billions of dollars" - says Prof. Stanisław Drożdż (Institute of Nuclear Physics PAS, Cracow University of Technology).

The analysis covered bitcoin price changes in the period from 2012 to April 2018, listed in one-minute sequences. Return rates were studied first. According to the scientists from the Institute of Nuclear Physics PAS, there is good quantitative evidence that in a mature market and in sufficiently short temporal scales, their probability distributions are subject to the inverse cubic law. This means that the distribution is described by the inverse of the third power of the examined value.

"Initially, our charts looked quite crooked, which wasn`t promising. But when we looked at the data more carefully, it suddenly turned out that this crookedness comes from the first two years of the studied period, the time when the market was just taking shape. Later, the rates of return fluctuated in accordance with the inverse cubic law" - says Prof. Drożdż.

The variability of the rates of return was then put under the microscope. In mature global markets, the signs of returns (that tell us whether we are earning or losing) are not correlated - and this is what the bitcoin market shows. Time correlations in the dynamics of finance may appear in subtler relationships, for example in various forms of volatility clustering. This type of effect occurs when the range of variability of the studied value is set at a more or less constant level for a certain period of time determining the size of the cluster, after which the range changes to a level significantly lower or higher than the previous one - and this type of alternation evolves over time.

Volatility clustering is associated with another feature: the system`s reluctance to change the trend. This reluctance is described by the parameter known as the Hurst exponent. It turns out that for the bitcoin market the Hurst exponent approaches the value of 0.5, which is characteristic of high reputation markets.

"One of the most sophisticated features signalling the maturity of the market is the multifractal nature of its characteristics. Multifractals are fractals of fractals, objects in which, in order to see self-similarity, various fragments of the fractal need to be magnified at different speeds. Multifractal analyses reveal dependencies that exist on many scales. In the case of bitcoin, we have detected multifractality in the functions of return rate fluctuation, particularly well visible in the last half year of the reviewed period. It was of the same type of multifractality as for normal, mature markets, such as stock, dollar, oil and bond markets" - says Prof. Drożdż.

He concludes: "The most important statistical parameters of the bitcoin market clearly indicate that for many months it has met all the important criteria of financial maturity. It seems that a similar transformation may be expected in the case of other cryptocurrencies,. If that happens, the largest market in the world, Forex, could have a very real competition".

PAP - Science in Poland

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