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The cryptocurrency market is a hyper-volatile ecosystem. A new study attempts to describe it using ecological modeling.
Royal Society Open Science, a peer-reviewed open-access scientific journal published by The Royal Society, has released a new research study on the cryptocurrency market. In "Evolutionary Dynamics of the Cryptocurrency Market," four leading academics employ a scientifically sound analysis of the entire crypto-market by studying 1,469 cryptocurrencies between April 2013, and May 2017.
The study discusses cryptocurrency "fundamentals," which are often regarded as primarily speculative, and the authors claim their results "shed light on the properties of the cryptocurrency market and establish a first formal link between ecological modelling and the study of this growing system."
The authors mention a few notable examples of relatively unchanging statistics including the number of active cryptocurrencies, market share distribution, and the turnover of cryptocurrencies. By adopting an "ecological perspective," the team was able to reproduce empirical data – matching biological evolution's neutral model to crypto-market activity – and established an academic bridge between ecology and cryptocurrency models. The neutral theory holds that variations between species are not dictated by natural selection, but by genetic mutations that don't affect an organism's survival or reproduction.
ETHNews asked Dr. Andrea Baronchelli, co-author of the study and lecturer at University College London's Centre for Blockchain Technologies, how the team arrived at this particularly novel approach to studying cryptocurrency markets:
"We were struck by the diversity of approaches explored by the existing literature. Some of the few articles published before we started treated cryptocurrencies as assets, others as technological innovations, and others as currencies. However, the metaphor of a cryptocurrency 'ecology' was very frequent, also, in the media. We took it seriously and selected one of the simplest models for evolution to start our investigation."
Although wild volatility is inherently part of cryptocurrency markets, the new 'ecological' study purports that several statistical properties within the crypto-market have been stable for years.
The report details why the neutral model was appropriate for this analysis:
"The neutral model translates in the simplest way three main assumptions: (i) interactions between cryptocurrencies are equivalent on an individual per capita basis (i.e. per US dollar), (ii) the process is stochastic, and (iii) it is a sampling theory, where the new generation is the basis to build the following one. In other words, the neutral model assumes that all species/cryptocurrencies are equivalent and that all individuals/US dollars are equivalent."
Still, the analogy isn't perfect. "The model is simple and does not capture the full complexity of the cryptocurrency ecology. However, the good match with at least part of the picture emerging from the data does suggest that some of the long-term properties of the cryptocurrency market can be accounted for based on simple hypotheses."
Jordan Daniell is a writer living in Los Angeles. He brings a decade of business intelligence experience, researching emerging technologies, to bear in reporting on blockchain and Ethereum developments. He is passionate about blockchain technologies and believes they will fundamentally shape the future. Jordan is a full-time staff writer for ETHNews.