It is well-known that the quality of cryptocurrency markets is well below that of the ones for the more established assets. They are prone to pumps and dumps, frequent liquidity deficits, hype and other harmful phenomena.
The study by Vitor et Al. recently published in the Journal of Behavioral and Experimental Finance provides scientific evidence to bolster this impression. It analyzed the behavior of 50 top cryptocurrencies’ prices compared to the CRIX investment index between 2015 and November 2018 in order to ascertain whether they demonstrate herding behavior and contagion.
The researchers found that cryptocurrencies show signs of significant adverse herding and Bitcoin contagion. In less jargon-heavy terms this means that during the times of downturn, market participants acted as if they were mostly imitating other investors and that Bitcoin price movements have significant impacts on other cryptocurrencies.
While these findings may be interpreted as calling for more regulation, it needs to be noted that the weaknesses of cryptocurrency markets may actually arise from regulations precluding established investors with experience and liquidity reserves from steering markets to better outcomes.