An Experimental Study of Cryptocurrency Market Dynamics

TL;DR

This study investigates how peer influence affects trader behavior in cryptocurrency markets through a large-scale online experiment, revealing significant short-term effects of individual buy actions on market activity.

Contribution

It introduces a novel experimental methodology to quantify peer influence in cryptocurrency trading and highlights how exchange design choices can amplify these effects.

Findings

Individual buy actions cause large short-term increases in buy-side activity

Market design may promote peer influence effects

Experimental approach enables detailed analysis of trader susceptibility

Abstract

As cryptocurrencies gain popularity and credibility, marketplaces for cryptocurrencies are growing in importance. Understanding the dynamics of these markets can help to assess how viable the cryptocurrnency ecosystem is and how design choices affect market behavior. One existential threat to cryptocurrencies is dramatic fluctuations in traders' willingness to buy or sell. Using a novel experimental methodology, we conducted an online experiment to study how susceptible traders in these markets are to peer influence from trading behavior. We created bots that executed over one hundred thousand trades costing less than a penny each in 217 cryptocurrencies over the course of six months. We find that individual "buy" actions led to short-term increases in subsequent buy-side activity hundreds of times the size of our interventions. From a design perspective, we note that the design choices of the exchange we study may have promoted this and other peer influence effects, which highlights the potential social and economic impact of HCI in the design of digital institutions.