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Cyber analytics may uncover the link between cryptocurrency coding and market behavior

March 3, 2021
cyber analytics uncover the link between cryptocurrency and market behavior

The world of cryptocurrency can be difficult to understand, especially when trying to predict how cryptocurrency will behave on the market. Researchers at City University of London examined the developers behind cryptocurrency to see if there were any connections to market behavior – and they found one.

“The first coding event linking two cryptocurrencies through a common developer leads to the synchronization of their returns,” states the abstract of the paper From code to market: Network of developers and correlated returns of cryptocurrencies, published in Science Advances.

The researchers examined 298 cryptocurrencies, shared on GitHub, with a trading volume larger than $100,000. They then looked at “links” between those cryptocurrencies. A “link” occurs when a developer of one cryptocurrency edits another.

“We showed that approximately 4 percent of developers contributed to the code of more than one cryptocurrency and that these developers are more active than the average, contributing together to 10 percent of all edits,” states the report.

Those 4 percent of developers and their linked cryptocurrencies had greater returns than randomly matched pairs. How does this translate to those investing in the market or following cryptocurrency trends? And what about those who code the cryptocurrency?

The researchers note that they cannot identify the mechanisms that drive the market synchronization. They speculate that it could be based on the awareness of traders of code development and the associated developers. If cryptocurrency by a developer has done well in the past, it’s assumed a new one by the same developer would signal success. The other potential cause is developers trading their own cryptocurrency, therefore driving up returns on the cryptocurrency they touched.

This brings up a potential issue with cryptocurrency, which is fully open source and intended to be transparent to users and traders. However, cryptocurrency code is considered isolated – this is the first study to look at connections across code. The researchers expressed that their study presents a “so-far overlooked systemic dimension for the transparency of code-based ecosystems.”

A lack of transparency across cryptocurrency may result in damage to users and other stakeholders and may negate the “code is law” principle that guides open-source coding.

Ultimately, “identifying a simple event in the development space that anticipates a corresponding behavior in the market, establishes a first direct link between the realms of coding and trading,” states the report.

The researchers are hopeful that their initial findings will lead to more research into this connection.

“We anticipate that our results will be of interest to researchers investigating how code and algorithms may affect the non-digital realm and spark further research in this direction.”

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Categories: Cyber Analytics