A Dynamical Systems Approach to Cryptocurrency Stability

TL;DR

This paper models cryptocurrency dynamics using a systems approach, analyzing stability conditions influenced by market trends and liquidity, revealing factors that stabilize or destabilize the market.

Contribution

It introduces a dynamical systems model for cryptocurrencies based on asset flow equations, providing stability analysis under various market parameters.

Findings

Trend-based motivations destabilize the system.

Additional liquidity from uptrends causes instability.

Recent price history anchoring stabilizes the system.

Abstract

Recently, the notion of cryptocurrencies has come to the fore of public interest. These assets that exist only in electronic form, with no underlying value, offer the owners some protection from tracking or seizure by government or creditors. We model these assets from the perspective of asset flow equations developed by Caginalp and Balenovich, and investigate their stability under various parameters, as classical finance methodology is inapplicable. By utilizing the concept of liquidity price and analyzing stability of the resulting system of ordinary differential equations, we obtain conditions under which the system is linearly stable. We find that trend-based motivations and additional liquidity arising from an uptrend are destabilizing forces, while anchoring through value assumed to be fairly recent price history tends to be stabilizing.