Chaos Scientific Journal Declares Bitcoin as Stable as Oil and the Dollar

Markets 1 min, 59 sec READ

by Ricardo Carrasco

A new scientific paper shows that the volatility of crypto markets is similar to what is expected of traditional assets like oil and gold.

A new paper published in Chaos: An Interdisciplinary Journal of Nonlinear Science suggests that the characteristic volatility of cryptocurrency markets is very similar to what is expected of traditional assets like oil and gold. According to Stanislaw Drozdz, the main author of the study and a professor at the Institute of Nuclear Physics of the Polish Academy of Sciences, this could mean that the Forex markets could be in for some real competition from the cryptosphere.

Mr. Drozdz commented on the motivations of the study in a statement published last week,

When new emerging financial markets started to appear in Central and Eastern Europe after the collapse of socialism, the question of their stability naturally arose […] A number of statistical criteria were identified at that time, making it easier to assess the maturity of the market. We were curious about the results we would get if we used them to look at the Bitcoin market, currently valued at hundreds of billions of dollars.

According to research, the probability distribution (a statistical function that describes all possible values for a given parameter) for return rates in mature markets, should be described by “the inverse of the third power of return rates”. The team behind the paper analyzed cryptocurrency prices from 2012 to April 2018, over one-minute increments, and found that although the first two years were affected by “system-specific irregularities” the volatility of the rate of returns in crypto markets matched what is expected of mature markets.

A measurement of the Hurst exponent, a quantity that ranges from 0 to 1, show that the Bitcoin market has a Hurst exponent of above 0.5, which means that the asset is highly reluctant to changes in trend directions, just like oil and gold. According to the study, Hurst exponents above 0.5 means that return rate increases are highly correlated with further increases, while the same applies to decreases.

The paper further explains that these trends can be taken as evidence that Bitcoin, and possibly other cryptocurrency markets, have real potential to become regular markets, in direct competition with the Forex market. Plus, the authors argue that cryptocurrencies offer unique views into the statistical features of market maturation trajectory, thanks to high-frequency price data being readily available.