Decomposing cryptocurrency high-frequency price dynamics into recurring and noisy components.

Area of Science:

• * Quantitative Finance
• * Market Microstructure
• * Digital Assets

Background:

• * Cryptocurrency markets exhibit unique temporal dynamics compared to traditional stock markets due to continuous operation.
• * Understanding these patterns is crucial for investors and regulators navigating the evolving digital asset landscape.
• * Previous research has explored cryptocurrency volatility but less so on detailed temporal activity patterns.

Purpose of the Study:

• * To investigate the intraday and intraweek temporal patterns of activity in major cryptocurrencies (Bitcoin, Ethereum, Dogecoin, WINkLink).
• * To decompose market activity into recurring and noise components using correlation matrix formalism.
• * To identify factors influencing cryptocurrency market dynamics and their integration into global financial markets.

Main Methods:

• * Analysis of logarithmic returns, trading volume, and transaction numbers sampled every 10 seconds from January 2020 to December 2022.
• * Decomposition of market activity into intraday and intraweek periods.
• * Application of correlation matrix formalism to separate recurring and noise components.

Main Results:

• * Three distinct enhanced-activity phases were observed, corresponding to Asian, European, and U.S. trading sessions.
• * Activity surges at 15-minute intervals, particularly on the hour, suggest algorithmic trading influence.
• * Bursts of activity in Bitcoin and Ethereum correlated with U.S. macroeconomic report releases (e.g., Nonfarm Payrolls, CPI).
• * 2022 showed the highest correlation in daily activity patterns, aligning with U.S. stock market correlations.
• * External factors were identified as drivers of repeatable market dynamics, while internal factors showed randomness consistent with Random Matrix Theory.

Conclusions:

• * Cryptocurrency markets display unique, session-dependent temporal activity patterns.
• * Algorithmic trading and external macroeconomic events significantly influence cryptocurrency market dynamics.
• * The findings support the increasing integration of cryptocurrencies within the broader global financial system.