Cryptocurrency Volatility Spreads Faster Than Investors Think

A new study on cryptocurrency volatility has found that price shocks spread rapidly across the market, affecting neighboring assets even when they are not directly related. Researchers used a dynamic Spatial ARCH model to analyze the relationships between 50 of the largest cryptocurrencies by market capitalization over a period of nearly four years.

The study's central result is that a substantial portion of a cryptocurrency's volatility was associated with volatility among its correlated neighbors during the same trading day, with an estimated price spillover effect of 0.43. This suggests that even diversifying across multiple assets may not provide as much protection against market-wide shocks as investors think.

Price volatility spreads faster than trading-volume volatility, which remains more specific to individual coins. The researchers also found a lagged network effect, where volatility among neighboring coins continued to influence an asset one day later.

The study's findings challenge the common interpretation of diversification in cryptocurrency markets and suggest that investors must consider not only the number of assets they own but also whether those assets are connected to the same volatility transmission system.