This paper is under CC 4.0 license. available on arxiv Authors: (1) Marcin W ˛atorek, Faculty of Computer Science and Telecommunications, Cracow University of Technology, ul. Warszawska 24, 31-155 Kraków, Poland and marcin.watorek@pk.edu.pl (M.W.); (2) Jarosław Kwapie ´n, Complex Systems Theory Department, Institute of Nuclear Physics, Polish Academy of Sciences, Radzikowskiego 152, 31-342 Kraków, Poland and jaroslaw.kwapien@ifj.edu.pl; (3)  Stanisław Drozd˙ z, Faculty of Computer Science and Telecommunications, Cracow University of Technology, ul. Warszawska 24, 31-155 Kraków, Poland, Complex Systems Theory Department, Institute of Nuclear Physics, Polish Academy of Sciences, Radzikowskiego 152, 31-342 Kraków, Poland and stanislaw.drozdz@ifj.edu.pl (S.D.). Table of Links Abstract and Introduction Data and Methodology Results and Discussion Conclusion and References Abstract: In this study the cross-correlations between the cryptocurrency market represented by the two most liquid and highest-capitalized cryptocurrencies: bitcoin and ethereum, on the one side, and the instruments representing the traditional financial markets: stock indices, Forex, commodities, on the other side, are measured in the period: January 2020–October 2022. Our purpose is to address the question whether the cryptocurrency market still preserves its autonomy with respect to the traditional financial markets or it has already aligned with them in expense of its independence. We are motivated by the fact that some previous related studies gave mixed results. By calculating the q-dependent detrended cross-correlation coefficient based on the high frequency 10 s data in the rolling window, the dependence on various time scales, different fluctuation magnitudes, and different market periods are examined. There is a strong indication that the dynamics of the bitcoin and ethereum price changes since the March 2020 Covid-19 panic is no longer independent. Instead, it is related to the dynamics of the traditional financial markets, which is especially evident now in 2022, when the bitcoin and ethereum coupling to the US tech stocks is observed during the market bear phase. It is also worth emphasizing that the cryptocurrencies have begun to react to the economic data such as the Consumer Price Index readings in a similar way as traditional instruments. Such a spontaneous coupling of the so far independent degrees of freedom can be interpreted as a kind of phase transition that resembles the collective phenomena typical for the complex systems. Our results indicate that the cryptocurrencies cannot be considered as a safe haven for the financial investments. complexity; financial markets; cryptocurrencies; cross-correlations; multiscale; hedge Keywords: 1. Introduction From the physics point of view, the financial markets are considered as one of the most complex systems we observe in our world [1]. Not only they are characterised by all the properties such systems can typically show, but there is also an important intelligent component involved that is decisively responsible for their enormous complexity. Among the well-known features of the financial markets is their flexibility in the transition between the disordered and ordered phases. Such a transition is the key feature associated with the market crashes but it is also often observed on the level of whole markets when some so-far independent markets start to have their dynamics substantially coupled (or vice-versa). Exactly this kind of phenomenon has recently been experienced by the cryptocurrency market, which has lost its relative dynamical autonomy and become significantly tied to the traditional financial instruments. In this work, we present quantitative arguments in support of this statement. Since the inception of Bitcoin in 2009, the cryptocurrency market has experienced a rapid surge. Although it used to be a niche and traded unofficially in its early years [2], trading takes place now 24/7 on more than 500 exchanges [3]. The current (October 2022) capitalization of the cryptocurrency market is approximately 1 trillion USD [3], which can be compared to the largest US tech stocks. During these 12 years of Bitcoin history, there were bubbles and crashes [4–6]. In particular, the foundation of Ethereum in 2015, which allowed for a new application of the blockchain technology in the form of smart contracts, and the subsequent Initial Coin Offer bubble [7] in 2018 reshaped the cryptocurrency market and made it appear in the public eye. A recent bubble in 2021, which was related to the adoption of DeFi (Decentralized Finance) and DEX (Decentralized Exchanges) trading [8], ended with a peak in November 2021, when the total market capitalization was close to 3 trillion dollars. Although there are more than 10,000 cryptocurrencies [3], Bitcoin and Ethereum are currently the most recognizable, and their share in the capitalization of the entire market changed from over 80% in early 2021 to 60% in October 2022 [3]. During these 12 years of development, the characteristics of the cryptocurrency market have changed significantly [9,10]. The properties of the cryptocurrency price return time series are now close to those observed in mature financial markets such as Forex [11]. However, it has long been believed that the cryptocurrency market, which itself is strongly correlated [12–18], especially during the Covid-19 period [19–23], has dynamics that is separate from the traditional financial markets [24–28] and that bitcoin can even serve as a hedge or safe haven [29,30] with respect to the stock market, Forex or the commodity market. The hedging potential of bitcoin was even compared to gold [31–35]. However, the results of many recent studies have changed this paradigm [36–43]. They reported that during the Covid-19 pandemic outburst and the related crash in March 2020 [44,45] the cryptocurrency market and, in particular, bitcoin was highly correlated with the falling stock markets [46–52]. Some studies even noted that this connection still occurred in the market recovery phase in the second half of 2020 [15,53]. The studies referenced above brought therefore rather mixed results and have led to uncertainty as to whether cryptocurrencies can be used for hedging the financial investments. This uncertainty opens space for further research on this topic and our study proceeds exactly in this direction. Our aim is to clarify whether the loss of the cryptocurrency market independence was temporary and primarily caused by the pandemic turmoil or it was only a part of a more general trend towards coupling of this market with the traditional financial markets. We intend to determine how strongly the cryptocurrency price changes are associated with the price changes in the traditional financial markets. To achieve that, the detrended multiscale correlation of the two principal cryptocurrencies: bitcoin (BTC) and ethereum (ETH) versus the traditional financial instruments: stock indices, commodities and currency exchange rates are studied based on high frequency data covering the period from January 2020 to October 2022, which is an extension of the period before 2020 that was analyzed in our earlier study [47]. The year 2022 is particularly interesting, because since the BTC price peak in November 2021, there is a joint bear market on the US tech stocks and the cryptocurrencies for the first time in the existence of the latter. On the basis of this observation, it is likely that there will be some detectable correlation between both markets. The year 2022 is also unique in the history of cryptocurrencies due to the presence of high inflation in the world against which Bitcoin was intended to protect [54–57]. Compared to the other articles dealing with correlations between the cryptocurrency market and traditional financial markets, in our research, the main task is to measure these correlations quantitatively on various time scales and for the fluctuations of various size. It can broaden the market practitioners’ perspective on the investing and hedging possibilities by incorporating the fluctuation size as an additional dimension that might be considered while making investment decisions.

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Integration of Cryptocurrency into the Global Financial Market: Abstract and Introduction

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