Investing in crypto: speculative bubbles and cyclic stochastic price pumps

TL;DR

This paper models cryptocurrency markets as self-organized systems prone to speculative bubbles, using agent-based and macroeconomic models to analyze price dynamics and risks associated with bubbles and investor behavior.

Contribution

It introduces a novel framework combining microscale agent-based models with macroscale ODEs to understand and quantify cryptocurrency price bubbles and associated risks.

Findings

Identification of price bubbles as transient phenomena in crypto markets

Derivation of formulas for market return rate and investment value

Quantification of total system risk as sum of bubble and investor behavior components

Abstract

The problem of investing into a cryptocurrency market requires good understanding of the processes that regulate the price of the currency. In this paper we offer a view of a cryptocurrency market as an environment for realization of a self-organized speculative scheme that results in a formation of a characteristic price bubble as a transient phenomenon. We use microscale, agent-based models to simulate the system behavior and derive macroscale ODE models to estimate such parameters as the return rate and the market value of investments. We provide the formula for the total risk of the system as a sum of two independent components, one being characteristic of the price bubble and the other of the investor behavior.