Critical slowing down associated with critical transition and risk of collapse in crypto-currency. Issue 3 (18th March 2020)

• Record Type: Journal Article
• Authors: Tu, Chengyi; D'Odorico, Paolo; Suweis, Samir
• Is Part Of: Royal Society open science. Volume 7:Issue 3(2020)
• Publication Date: 2020-03-18
• Subjects: crypto-currency -- critical transition -- stochastic transition -- critical slowing down; Science -- Periodicals; 500
• DOI: 10.1098/rsos.191450
• Languages: English
• ISSNs: 2054-5703

Abstract

Abstract : The year 2017 saw the rise and fall of the crypto-currency market, followed by high variability in the price of all crypto-currencies. In this work, we study the abrupt transition in crypto-currency residuals, which is associated with the critical transition (the phenomenon of critical slowing down) or the stochastic transition phenomena. We find that, regardless of the specific crypto-currency or rolling window size, the autocorrelation always fluctuates around a high value, while the standard deviation increases monotonically. Therefore, while the autocorrelation does not display the signals of critical slowing down, the standard deviation can be used to anticipate critical or stochastic transitions. In particular, we have detected two sudden jumps in the standard deviation, in the second quarter of 2017 and at the beginning of 2018, which could have served as the early warning signals of two major price collapses that have happened in the following periods. We finally propose a mean-field phenomenological model for the price of crypto-currency to show how the use of the standard deviation of the residuals is a better leading indicator of the collapse in price than the time-series' autocorrelation. Our findings represent a first step towards a better diagnostic of the risk of critical transition in the price and/or volume of crypto-currencies.