Analysis of Cryptocurrency Interdependencies

Abstract

In a world where no country, market, or economy is an island, interconnectivity is becoming a fundamental feature of almost all social and economic systems. In the case of digital assets like cryptocurrencies, the impact of interconnectivity on their performance and price trajectory is amplified. Studying these phenomena is essential for understanding the processes driving the crypto-markets. In this paper, we propose seven different approaches to create a network of eighteen most important cryptocurrencies. The first three approaches discover correlations between cryptocurrencies based on their daily prices, daily returns, and sentiment extracted from Reddit data. The following two approaches offer insights from the frequency of joint appearance of cryptocurrencies in Google news and Reddit data. The remaining two approaches determine each cryptocurrency’s impact over the others when forecasting prices and returns. Furthermore, we explore the networks’ interdependencies to explore the similarities of the cryptocurrency networks generated by different approaches. The proposed methodology allows us to understand the dynamics in the cryptocurrency markets and the different processes that influence their performance.