Bubbles and crashes in cryptocurrencies: Interdependence, contagion, or asset rotation?

• Published in: Finance research letters 2022-05, Vol.46, p.102494, Article 102494
• Main Authors: Chowdhury, Md Shahedur R., Damianov, Damian S., Elsayed, Ahmed H.
• Format: Article
• Language: English
• Subjects: Bubbles; Contagion; Crashes; Cryptocurrencies; Interdependence; Rotation
• ISSN: 1544-6123; 1544-6131
• DOI: 10.1016/j.frl.2021.102494

•We analyze return dynamics among major cryptocurrencies under extreme market conditions.•We further investigate the nature of the connectedness; whether it's interdependence, contagion, or asset rotation.•Results show that cryptocurrencies are highly connected and interlinked under different market conditions.•Analysis of the timing of bubble and crash periods uncovers the presence of interdependence and contagion effects.•Asset dynamics is mainly driven by the technology, in particular the consensus protocol of cryptocurrencies. Using a quantile vector autoregressive model to capture return dynamics in extreme market conditions, we find that the cryptocurrency market exhibits a high level of market connectedness. Bitcoin is a net transmitter of return spillovers during busts and a net receiver during booms. Analysis of the timing of bubble and crash periods uncovers the presence of interdependence and contagion effects. Asset dynamics is driven to a great extent by the technology, in particular the consensus protocol of cryptocurrencies. There is only limited evidence for asset rotation, and it involves mostly Ripple.