Modelling Determinants of Cryptocurrency Prices: A Bayesian Network Approach

Understanding the relationships between cryptocurrencies is important for making informed investment decisions in this financial market. Our study utilises Bayesian networks to examine the causal interrelationships among six major cryptocurrencies: Bitcoin, Binance Coin, Ethereum, Litecoin, Ripple, and Tether. Beyond understanding the connectedness, we also investigate whether these relationships evolve over time. This understanding is crucial for developing profitable investment strategies and forecasting methods. Therefore, we introduce an approach to investigate the dynamic nature of these relationships. Our observations reveal that Tether, a stablecoin, behaves distinctly compared to mining-based cryptocurrencies and stands isolated from the others. Furthermore, our findings indicate that Bitcoin and Ethereum significantly influence the price fluctuations of the other coins, except for Tether. This highlights their key roles in the cryptocurrency ecosystem. Additionally, we conduct diagnostic analyses on constructed Bayesian networks, emphasising that cryptocurrencies generally follow the same market direction as extra evidence for interconnectedness. Moreover, our approach reveals the dynamic and evolving nature of these relationships over time, offering insights into the ever-changing dynamics of the cryptocurrency market.

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Rank is all you need: development and analysis of robust causal networks

Cornell,

Mitchell,

Roughan

2024

Appl Netw Sci

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Financial networks can be constructed to model the intertemporal price dependencies within an asset market, giving rise to a causal network. These networks are traditionally inferred through multivariate predictive modelling. However, the application of these techniques to financial data is highly challenged. The interplay of social and economic factors produces unstable price behaviour that violates most conventional modelling assumptions, limiting the informational content of networks derived from standard inference tools. Despite these limitations, it remains unclear whether the improved accuracy of robustly estimated networks translates into qualitatively unique insight. This study provides an extended analysis of our recently introduced Rank-Vector-Autoregression model, demonstrating its capacity to identify properties that are undetected with standard methodology. We initially validate the superior accuracy of Rank-VAR through a simulation study on processes that contain adversarial abnormalities. When applied to a dataset of 261 cryptocurrencies, our rank network uniquely displays capitalisation-dependent hierarchical ordering, with outgoing influence being positively, and incoming influence negatively correlated to total coin valuation. Applying our method to the squared deviations verifies that even under robust estimation, volatility networks display fundamentally differing dynamics to raw returns, with more connections, clustering, and causal cycles. Our results demonstrate the use of Rank-VAR to identify and verify unique properties in the causal structures of cryptocurrency markets.

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Modelling Determinants of Cryptocurrency Prices: A Bayesian Network Approach

Cited by 3 publications

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Rank Is All You Need: Robust Estimation of Complex Causal Networks

Rank Is All You Need: Robust Estimation of Complex Causal Networks

Dynamic evolution of causal relationships among cryptocurrencies: an analysis via Bayesian networks

Rank is all you need: development and analysis of robust causal networks

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