On the stability of stablecoins

This paper investigates the volatility processes of stablecoins and their potential stochastic interdependencies with Bitcoin volatility. We employ a novel approach to choose the optimal combination for the power law exponent and the minimum value for the volatilities bending the power law. Our results indicate that Bitcoin volatility is well-behaved in a statistical sense with a finite theoretical variance. Surprisingly, the volatilities of stablecoins are statistically unstable and contemporaneously respond to Bitcoin volatility. Also, whereas the volatilities of stablecoins are not Granger-causal for Bitcoin volatility, lagged Bitcoin volatility exhibits Granger-causal effects on the volatilities of stablecoins. We conclude that Bitcoin volatility is a fundamental factor that drives the volatilities of stablecoins.

Automated summary

This study found that while Bitcoin volatility behaves well statistically, stablecoin volatility is unstable and responds concurrently to Bitcoin volatility. Although stablecoin volatility does not Granger-cause Bitcoin volatility, lagged Bitcoin volatility does have an effect on stablecoin volatility.