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2020 | OriginalPaper | Buchkapitel

Bitcoin and Its Offspring: A Volatility Risk Approach

verfasst von : Walter Bazán-Palomino

Erschienen in: Advanced Studies of Financial Technologies and Cryptocurrency Markets

Verlag: Springer Singapore

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Abstract

This study examines the relationship between the return on Bitcoin and the returns on its forks (Litecoin, Bitcoin Cash, Bitcoin Gold, Bitcoin Diamond, and Bitcoin Private). I obtain volatility series and time-varying correlation coefficients (Bitcoin with each of its forks) based on both univariate and multivariate GARCH models (EWMA, DCC, and BEKK). In terms of volatility, the gains of using a multivariate volatility approach are not substantial. However, the three multivariate volatility models offer a better estimation of the time-varying correlation. This study provides evidence that the volatility of Bitcoin forks and the volatility of Bitcoin are dynamically related, and there is a transmission of volatility risk from Bitcoin forks to Bitcoin. The results suggest that Bitcoin and its forks behave as crypto-currencies during bad times and as assets during good times. Also, for most of the sample period, Bitcoin forks do not offer a hedge against Bitcoin risk.

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Vorheriges Kapitel Forecasting of Cryptocurrency Prices Using Machine Learning

Satoshi Nakamoto is the nickname used by the person or persons who wrote Bitcoin white paper, and created Bitcoin protocol.

As discussed in the next section, a user is not necessarily a miner.

Bitcoin went from USD 998.33 on January 1, 2017, to USD 19,497.4 (maximum historical price) on December 16, 2017. Over this year, Litecoin hit a record high price of USD 358.34 on December 18, 2017, representing a return of 7845.4% year-to-date. Bitcoin Cash started a precipitous rise shortly after its launch in August 2017, increasing from about USD 300 to a peak of USD 3,923 on December 20, 2017. Likewise, Bitcoin Gold was created in October 2017 and since then, its price meteorically raised from USD 142.92 to USD 453.45 on December 20, 2017, being its maximum level.

The source of information was crypto-currencies white papers and websites, and other online sources such as www.coinmarketcap.com, www.cointelegraph.com, www.coindesk.com, and www.coinbase.com.

Antonopoulos (2017) mentions that Bitcoin consensus is based on four processes: (a) independent verification of each transaction by any node, (b) independent aggregation of Bitcoin transactions into a new block by a miner, (c) independent verification of a new block by all users in the network, and (d) independent selection of the chain with the highest proof-of-work (highest cumulative computational power) by any node.

The block size was arbitrarily set to 1 MB and the reason was to prevent attack from hackers to the network.

According to the Bitcoin Energy Consumption Index (https://digiconomist.net/bitcoin-energy-consumption), the global energy consumption of all Bitcoin mining is equivalent to the power usage of the Czech Republic.

In this sense, Hayes (2017) made an attempt to try to link these factors and found that the cost of mining influences the price of crypto-assets.

In this context, copy means using almost the same consensus algorithm, but with slightly different rules. If the blockchain community wants to switch from proof-of-work to other protocol, for example, proof-of-stake, this is not considered as a fork. At least for the purpose of this research.

The results are available upon request.

For further details, see Tse, Y. K. (2002). Residual-based diagnostics for conditional heteroscedasticity models. The Econometrics Journal 5 (2), 358–374.

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Titel: Bitcoin and Its Offspring: A Volatility Risk Approach
verfasst von: Walter Bazán-Palomino
Verlag: Springer Singapore
Buch: Advanced Studies of Financial Technologies and Cryptocurrency Markets
Print ISBN: 978-981-15-4497-2

Electronic ISBN: 978-981-15-4498-9

Copyright-Jahr: 2020
DOI: https://doi.org/10.1007/978-981-15-4498-9_13