A fractal theory of investor demand for cryptocurrencies

ABSTRACT

We examine the linkages between Bitcoin, Ethereum, Tether and USD Coin returns—in the context of the post-epidemic landscape. Our paper utilizes the underpinning concept of the fractal market hypothesis. By employing our theoretical nexus alongside the continuous wavelet transform, we elucidate the changes in investor demand during notable events. Our results suggest that all four cryptocurrencies exhibited significant volatility in response to the March 2020 pandemic and the Delta variant announcements. Moreover, the fall of Three Arrows Capital and FTX affected all cryptocurrencies, while Silicon Valley Bank’s liquidation only impacted the stablecoins. Pairwise, investors heavily demand stablecoins during financial turmoil, which causes unconditional synchronization. The two cryptocurrency categories are anti-phasing in a market regime where traders are widely unanimous, but in-phasing when the sentiment consists of divergent perceptions. These cross-cryptocurrency phases of demand persist in the long run for USD Coin but are only medium-term for Tether.

KEYWORDS:

• Bitcoin
• ethereum
• cryptocurrency
• stablecoin
• investor demand

JEL CLASSIFICATION:

• G14
• G15

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ CoinGecko utilizes a global volume-weighted average price for each token on each crypto-exchange, correcting for any potential bias. Crypto exchanges are ranked based on their “trust scores,” which include total trading volume, internet traffic, trading frequency etc. Therefore, the liquidity reliability of each cryptocurrency and the relevant crypto exchange are prioritized. More information can be found below:

https://www.coingecko.com/en/faq

https://www.coingecko.com/en/methodology#:~:text=Market%20Data-,1.,volume%2Dweighted%20average%20price%20formula.

² Different to investment tokens, all USD-denominated tokens of Tether and USD Coin are redeemable one-to-one for the US dollar. More information on reserves composition can be found below:

https://tether.to/en/transparency/?tab=usdt

https://www.circle.com/en/transparency

3 For comprehensive details on the specifications of CWT, CWPS, and WTC, please refer to In and Kim (2013), and Aguiar-Conraria and Soares (2011).