Unveiling the Influencing Factors of Cryptocurrency Return Volatility

Round 1

Reviewer 1 Report

Comments and Suggestions for Authors

Cryptocurrency Return Volatility: An Insight into the Factors of Influence examines the volatility of cryptocurrency returns, focusing on the factors that contribute to this volatility. The study covers the period from 2016 to 2022, and uses the GARCH model for analysis. The methodology is appropriate. While the GARCH model is a robust choice for analyzing volatility, its assumptions and limitations must be considered when interpreting the results. The study's timeframe, from 2016 to 2022, encompasses significant events in the cryptocurrency market, which should provide a comprehensive view of volatility. There are, however, a few minor things that need to be addressed in the paper.

 

First, the term Ether refers to the native token on the Ethereum blockchain.  In several places, including the abstract, the token in referred to as Ethereum.  Unfortunately, the article does not have page numbers or line numbers, otherwise I would refer to the exact locations.

 

The start of the introduction references the “genesis” of cryptocurrencies “back in the 2010s”. However, the genesis would be in 2009 with the establishment of Bitcoin. This is correctly noted later in the paper.

 

The paper states that “Crypto coins can be brought into existence through two mechanisms […] Proof-of-Work and Proof-of-Stake.”  While these are two mechanisms by which coins can be brought into existence (and the two most common), this seems to incorrectly imply that there are not other mechanisms.  It would be good to clarify this for readers that may be unfamiliar.

 

In the literature review it states that Bitcoin “transactions are discrete and untraceable. They are and can never be associated with the identity of the buyer or seller.” This, however, is inaccurate.  All transactions are recorded on a public and immutable ledger making them easy to trace.  The pseudonymous nature means that it may be difficult to identify a user.  However, once identified, a person can be connected to all transitions they have ever made.  This is a common misconception about Bitcoin that exists in early literature, and I note that the article cited earlier in that paragraph is from 2012 (Kaplanov).  In general, you may want to ensure more current sources are being used while studying this emerging field.

 

Overall, this is an interesting and well written paper.  I encourage the authors to address the minor issues identified above and then believe it will make a valuable addition to the existing literature.

Author Response

Dear reviewer, 

Thank you very much for taking the time to review this manuscript. Please find the detailed responses below in all your comments in red font. 

First, the term Ether refers to the native token on the Ethereum blockchain.  In several places, including the abstract, the token in referred to as Ethereum. Unfortunately, the article does not have page numbers or line numbers, otherwise I would refer to the exact locations.

Reply and revision: We thank the reviewer for this remark. We have corrected all the paper in 21 cases. Page numbers are also added.

The start of the introduction references the “genesis” of cryptocurrencies “back in the 2010s”. However, the genesis would be in 2009 with the establishment of Bitcoin. This is correctly noted later in the paper.

Reply and revision: We thank the reviewer for this remark. We have corrected paragraph 1 of the introduction.

The paper states that “Crypto coins can be brought into existence through two mechanisms […] Proof-of-Work and Proof-of-Stake.”  While these are two mechanisms by which coins can be brought into existence (and the two most common), this seems to incorrectly imply that there are not other mechanisms.  It would be good to clarify this for readers that may be unfamiliar.

Reply and revision: We thank the reviewer for bringing us to this point. We have corrected paragraph 6 in the literature review.

In the literature review it states that Bitcoin “transactions are discrete and untraceable. They are and can never be associated with the identity of the buyer or seller.” This, however, is inaccurate.  All transactions are recorded on a public and immutable ledger making them easy to trace.  The pseudonymous nature means that it may be difficult to identify a user.  However, once identified, a person can be connected to all transitions they have ever made.  This is a common misconception about Bitcoin that exists in early literature, and I note that the article cited earlier in that paragraph is from 2012 (Kaplanov).  In general, you may want to ensure more current sources are being used while studying this emerging field.

Reply and revision: We thank the reviewer and we have corrected by revising paragraph 6 in session 2.2 accordingly.

Overall, this is an interesting and well written paper.  I encourage the authors to address the minor issues identified above and then believe it will make a valuable addition to the existing literature.

Reply: We are very grateful to the reviewer for the careful and thorough reading of this manuscript and for the thoughtful comments and constructive suggestions, which helped to improve the quality of this manuscript. THANK YOU!

Reviewer 2 Report

Comments and Suggestions for Authors

The paper investigates the volatility of returns for specific cryptocurrencies, namely Bitcoin (BTC), Ethereum (ETH), and XRP. Applying the General Autoregressive Conditional Heteroscedasticity (GARCH) model, the authors aim to explore the impact of trading volume, information demand, stock returns, and exchange rates on the volatility of these cryptocurrencies from 2016 to 2022.

 

Overview of the Authors' Results. 

1. The authors focus on BTC, ETH, and XRP due to their market capitalisation and representativeness in decentralised and unbacked cryptocurrencies.

2. The GARCH model analyses various factors influencing these cryptocurrencies' return volatility. 

3. The authors examine the impact of trading volume, information demand (measured through Google Trends), world stock market index returns (using MSCI ACWI), and USD/EUR exchange rates. Pearson's correlations are estimated too. 

 

Potential Flaws in the Study:

1. The study’s primary limitation is focusing on only three cryptocurrencies. The crypto market is vast and diverse, with many other significant cryptocurrencies with different trends and influences that could provide additional insights into the phenomenon of return volatility. This narrow selection inadequately represents the entire cryptocurrency market.

2. While the paper considers important factors like trading volume and exchange rates, it does not explore other potential influencers of cryptocurrency volatility. Factors such as regulatory changes, technological advancements, macroeconomic indices, the entry of institutional investors and so on should be analysed. These aspects are necessary for the comprehensiveness of the study.

3. The paper does not delve into the broader market context or the interplay between cryptocurrencies and other asset classes beyond traditional stocks and the USD/EUR exchange rate. A more extensive examination of these relationships is needed.

4. The study needs more practical outcomes or significant findings that investors could directly apply.

5. Authors need to analyse the scientific publications on the topic. The paper's problems and further research concerns are solved.

 

In conclusion, while the paper offers valuable insights into cryptocurrency volatility using the GARCH model, its scope is limited. Expanding the range of cryptocurrencies and factors considered, and focusing on practical implications are imperative. Therefore, the paper needs additional research, should be rejected, or significantly rewritten. Significant changes and research are required. 

Author Response

Thank you very much for taking the time to review this manuscript. Please find the detailed responses below in red and the corresponding re-submitted file.

Potential Flaws in the Study:

1. The study’s primary limitation is focusing on only three cryptocurrencies. The crypto market is vast and diverse, with many other significant cryptocurrencies with different trends and influences that could provide additional insights into the phenomenon of return volatility. This narrow selection inadequately represents the entire cryptocurrency market.

Reply and revision: Thank you the reviewer for bringing us at this point. The concentration on the specific currencies was based on their capitalization in market. BTC only as the first coin represents 40% of the cryptomarket and most of the studies that define the tendency and the behavior of this market are based on bitcoin. Yet this of’course is referred to as a future step in our research: to include more coins in the study.

2. While the paper considers important factors like trading volume and exchange rates, it does not explore other potential influencers of cryptocurrency volatility. Factors such as regulatory changes, technological advancements, macroeconomic indices, the entry of institutional investors and so on should be analysed. These aspects are necessary for the comprehensiveness of the study.

Reply and revision: This study was mainly concentrated on the inner factors that affect the demand of cryptocurrencies. Macroeconomic variables have been proven from the literature not to affect the volatility of returns and for this reason were not included. Cryptocurrency markets do not have regulatory authorities that control them, while posing regulations in the rest of the market doesn’t really affect them, as we’ve seen no correlation with the stock markets. While as for the other factors of’course they might be included in further research for as long as we can also define proper variables that can capture them.

3. The paper does not delve into the broader market context or the interplay between cryptocurrencies and other asset classes beyond traditional stocks and the USD/EUR exchange rate. A more extensive examination of these relationships is needed.

Reply and revision: The examination of this relationship is not included in the objectives of this study. It could serve as a new objective for another study.

4. The study needs more practical outcomes or significant findings that investors could directly apply.

Reply and revision: We acknowledge the value of your suggestion to incorporate practical outcomes for the benefit of our readers, including investors. However, we must emphasize that due to the nature of our findings and the diverse market conditions in different countries, it may not be possible to provide prescriptive directives for direct application by investors. Investment decisions are influenced by a multitude of factors, and market conditions vary significantly.

5. Authors need to analyse the scientific publications on the topic. The paper's problems and further research concerns are solved.

Reply and revision: This research has gone through an extensive literature review including a considerable number of scientific papers that served the purpose of it.

In conclusion, while the paper offers valuable insights into cryptocurrency volatility using the GARCH model, its scope is limited. Expanding the range of cryptocurrencies and factors considered, and focusing on practical implications are imperative. Therefore, the paper needs additional research, should be rejected, or significantly rewritten. Significant changes and research are required. 

Reply: We are very grateful to the reviewer for careful and through reading of this manuscript and for the thoughtful comments and constructive suggestions, which help to improve the quality of this manuscript. Based on these comments and suggestions we have made careful modifications to the original manuscript.

Author Response File: Author Response.docx

Reviewer 3 Report

Comments and Suggestions for Authors

The paper, which focuses on main cryptocurrencies' volatility is one of the well-written ones. The paper test the volatility of the cc's by using GARCH model. The study contributes the literature with its findings. I have just some minor suggestions listed below. 

Fig. 2 should be narrowed.

The equation on page 14 should fit on the page.

On page 15 & 16 in title 4.1 the paragraphs should lean to the both sides.

Equations on page 17-19 should fit on the page.

On Discussion section references “(Balcilar, Bouri, Gupta, & Roubaud, 2017), (El Alaoui, Bouri, & Roubaud, 2019),” should be given in same paranthesis.

Author Response

Thank you very much for taking the time to review this manuscript. Please find the detailed responses below in red and the corresponding revisions in the resubmitted file.

The paper, which focuses on main cryptocurrencies' volatility is one of the well-written ones. The paper test the volatility of the cc's by using GARCH model. The study contributes the literature with its findings. I have just some minor suggestions listed below. 

Fig. 2 should be narrowed.

Reply and revision: noted and corrected

The equation on page 14 should fit on the page.

Reply and revision: noted and corrected

On page 15 & 16 in title 4.1 the paragraphs should lean to the both sides.

Reply and revision: noted and corrected

Equations on page 17-19 should fit on the page.

Reply and revision: noted and corrected

On Discussion section references “(Balcilar, Bouri, Gupta, & Roubaud, 2017), (El Alaoui, Bouri, & Roubaud, 2019),” should be given in same paranthesis.

Reply and revision: noted and corrected.

We are grateful to the reviewer for the insightful comments on our paper.

Author Response File: Author Response.docx

Round 2

Reviewer 2 Report

Comments and Suggestions for Authors

Thank you for your responses. However, it is recommended that the conclusions be revised. The conclusions should indicate the original contribution of the authors (without stating well-known facts or results of others) and demonstrate how, which models, and for which assets an investor might use this analysis.

Author Response

Thank you very much for taking the time to review this manuscript. Please find the detailed responses below and the corresponding revisions/corrections highlighted/in track changes in the re-submitted file.

Below is the answer to the reviewer's comment in red font.

Thank you for your responses. However, it is recommended that the conclusions be revised. The conclusions should indicate the original contribution of the authors (without stating well-known facts or results of others) and demonstrate how, which models, and for which assets an investor might use this analysis.

Reply and revision: We thank the reviewer for bringing us to this point. According to the reviewer's recommendation, we have revised and rewritten the conclusion of the paper. The following description has been included in the manuscript. Please refer to pages 19-21 in the manuscript.