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Analysis of cryptocurrency connectedness based on network to transaction volume ratios

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  • Christian M. Hafner

    (UCLouvain)

  • Sabrine Majeri

    (UCLouvain)

Abstract

Network to Transaction (NVT) ratio is a measure that describes the relationship between transaction volume and market capitalization, and that may serve as an indicator for the valuation of a cryptocurrency. We build a connectedness network connecting 39 cryptocurrencies based on mutual contributions to the variances of forecast errors for NVT ratios. We find that NVT connectedness is not related to market capitalization, as we have large and small cryptocurrencies by market cap that propagate large NVT shocks (e.g. Litecoin, Dogecoin, Bitcoin Cash(bch), OMG Network and Decentraland). The largest transmitter of NVT shocks is OMG Network, which receives little public attention. Cryptocurrencies relying on proof of stake as a consensus mechanism are the smallest receivers of NVT spillovers from other cryptocurrencies. These assets are also the least interconnected, which makes them attractive from a risk diversification point of view. This complements the energy efficiency of PoS compared with proof of work.

Suggested Citation

  • Christian M. Hafner & Sabrine Majeri, 2022. "Analysis of cryptocurrency connectedness based on network to transaction volume ratios," Digital Finance, Springer, vol. 4(2), pages 187-216, September.
    • Handle: RePEc:spr:digfin:v:4:y:2022:i:2:d:10.1007_s42521-022-00054-w
    DOI: 10.1007/s42521-022-00054-w
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    More about this item

    Keywords

    Vector autoregressions; ICA; LASSO; Networks; Cryptocurrencies;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • Z11 - Other Special Topics - - Cultural Economics - - - Economics of the Arts and Literature

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