Early Warning Signals for Cryptocurrency Market States

TL;DR

This paper analyzes the evolution of correlation structures in the cryptocurrency market from 2017 to 2022, identifying characteristic patterns that enable clustering of market states, thereby providing insights into its complex dynamics.

Contribution

It introduces a method to analyze and cluster cryptocurrency market states based on correlation structures over a five-year period, highlighting characteristic patterns.

Findings

Identification of characteristic correlation structures in the market

Clustering of market into four distinct states

Insights into the evolving dynamics of cryptocurrency markets

Abstract

Being archetypal complex systems, financial markets exhibit rich set of dynamics in their interactions. In this paper, we focus on the recently evolved cryptocurrency market as an example of a complex system and analyse the evolution of cross correlation structure of cryptocurrencies in the 5 year period from 2017 to 2022. We observe characteristic correlation structures in the observation time window duration and use these specific structures to cluster the cryptocurrency market in 4 market states.