INTERCONNECTION AMONG CRYPTOCURRENCIES: USING VECTOR ERROR CORRECTION MODEL

Abstract

The research paper aimed to investigate the relationship between the major popular cryptocurrencies in terms of market dominance and identify any pattern and/or causality between the short-run and long-run series. Cryptocurrency has received much attention because of media publicity and the financial returns it generates within a short time, with its associated risk level. This innovative financial research investigates for the first time by thoroughly analyzing nine top cryptocurrencies, excluding stablecoins. The study used the Vector Error Correction model to analyse how the various cryptocurrency under investigation are interconnected. The results demonstrated how concentrated the causality effect is on some specific cryptocurrencies. The study uses the top nine cryptocurrencies on the crypto markets, excluding stablecoins that have existed since October 2017. The frequency of the data is 1523 daily closing prices. The choice of the data stemmed from its availability and has existed since October 2017. The primary outcome is clear and possibly explains the dominance of Bitcoin and Ethereum as the main drivers of the prices of related or altcoins. Any movement in the price level of the two dominant cryptos affects all the altcoins on the crypto market. The research further unearths the interconnection or correlation between the major cryptocurrencies. It will assist institutional and retail investors, fund managers, and managers, with the possible mix of assets in their portfolio based on their risk appetite level in making investment decisions.