VNU UNIVERSITY OF ECONOMICS & BUSINESS Faculty of Finance - Banking GRADUATION THESIS RETURNS AND VOLATILITY CONNECTEDNESS BETWEEN NFTs, DEFI ASSETS AND CONVENTIONAL CRYPTOCURRENCIES Instructor MSc Nguyễn Hồng Minh Hanoi, 2023 ACKNOWLEDGMENT! During my research and implementation of this Thesis topic, I have received enthusiastic help and valuable encouragement. With all respect and gratitude, I would like to send our sincere thanks to: The teachers and experts from the Faculty of Finance - Banking for taking the time to answer and analyze questions, contributing to creating a foundation for the group to be confident in the implementation. I would like to express our gratitude and deepest thanks to MSc. Nguyen Hong Minh - Lecturer of the Faculty of Finance - Banking.
The important person who always guided the lesson wholeheartedly. I feel very fortunate to the support from her. Due to the limited knowledge and time, the research paper cannot avoid its shortcomings and errors. We hope to receive comments from teachers and readers for the study to be more complete.
Once again, we would like to thank and wish everyone good health, happiness, and success. Best regards, List Of TADIe 0 0PPn8Ẻhh. 5 LiSt Of F Ï( UIT. <5 << 5 sọ Họ Họ họ.
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- G œ << cọ gọn Họ. Họ lì 98 54 List of Abbreviations AVAX Avalanche BTC Bitcoin CAGR Compound Annual Growth Rate DeFi Decentralize Finance ETH Ethereum GFEVD Generalized Forecasting Error Variance Decomposition ICP Internet-Computer IRF Impulse Response Function LINK Chainlink MANA Decentraland NFT Non-Fungible Token ROI Return on Investment SEC Securities and Exchange Commission TCI Total Connectedness Index TVP-VAR Time-varying parameter-vector Autoregression TVP-VMA _ Time-varying parameter vector Moving Average UNCTAD United Nation Conference on Trade and Development UST TerraUSD VAR Vector Autoregression 3AC Three Arrows Capital List of Table Table 2.1 The 2022 Global Crypto Adoption Index Table 2.2 Comparison between cryptocurrencies, DeFi assets and NFTs Table 3 Illustration of DY connectedness indices Table 4.1 Summary statistics of return Table 4.2 Summary statistics of volatility Table 4.3 Averaged dynamic connectedness of return Table 4.4 Averaged dynamic connectedness of volatility List of Figure Figure 4.1 Return of different crypto assets during the analyzed period Figure 4.2 The volatility of different crypto assets during the analyzed period Figure 4.3 Dynamic total connectedness of return Figure 4.4 Dynamic total connectedness of volatility Figure 4.5 Pairwise spillover connectedness CHAPTER 1: INTRODUCTION 1.1 Rationale Blockchain technology and money platforms and digital assets are growing and gaining wide popularity. The strong development comes from strong developments in the field of information technology combined with events that bring strong impact around the world, especially financial markets. Introduced with the prospect of becoming the future of the financial market, the emergence of cryptocurrencies and digital assets have become an investment channel that has received strong interest in the financial market, attracting millions of investors to participate and promising to grow strongly in the future.
With a multitude of advantages that are considered much more optimal than traditional investment channels such as data security or the fact that all data information is publicly listed and accessible to everyone. The decentralized market has recorded an explosion in trading volume, transaction value or the number of new investors participating. Investor’s interest in cryptocurrencies was demonstrated by the all-time highs reached by bitcoin (BTC) and ether (ETH), the record-breaking growth of decentralized finance (DeFi) protocols, the surpassing of the $3 trillion market cap for cryptocurrencies, the exponential growth of the non-fungible token (NFT) market through the explosion of returns of floating NFTs (Decentraland, BayC) and investments by venture capital firms in many crypto businesses. The Terra ecosystem, which is led by the algorithmic stable coin UST and sibling cryptocurrency LUNA, attracted a lot of interest and growth among new cryptocurrency initiatives.
Despite such attention and investment into the market, crypto market is still under speculation. Many investors still doubt the market and worries about the certainty of the market can be seen. On market trends and fluctuations, digital assets are still being evaluated and due to the characteristics of these markets - independent of any reputable legal entity in the world, the assessment and control of this market is not clear and official. Investors do not yet have a suitable tool to be able to value, evaluate and compare between these promising but also extremely risky new forms of investment.
The article will explore and clarify the information and characteristics of cryptocurrencies, DeFi assets and NFTs. The movement trend of the cryptocurrency market is judged by the correlation and investment performance between different forms of investment in this market. From there, it is possible to know the correlation and connection between the price ofthese 3 asset classes (cryptocurrencies, DeFi 6 assets and NFTs) really according to the natural adjustment to market trends, or simply inflated digital products, which do not have actual value like other conventional profitable assets.2 Research goal The research is conducted in order to, first of all, to define and ïllustrate the basics of types of cryptocurrency, DeFi asset and NFT in general. Information about cryptocurrencies is provided with definition, characteristics, illustrations and real examples are given to specify such information.
The aim of the research is to figure out the movement of crypto assets in the market and to find out the traits of the movement. The research uses the rate of return and volatility index of different crypto assets in order to find out the correlation between such index and the changes in the market of crypto assets. From this, the main objective of the research is to find the connectedness between different types of crypto assets.3 Research question This study will answers two key questions: ‘What is the level of return connectedness between NFTs, DeFi assets and conventional cryptocurrency market?’ and ‘What is the level of volatility connectedness between NFTs, DeFi assets and conventional cryptocurrency market?’ to address the content of the research paper.4 Research object and scope 1.1 Research object Based on the contribution from the basis of the conclusion that these new digital assets remain relatively detached from traditional asset classes (Imran Yousafa, Larisa Yarovaya, 2022), this study focus on research on returns and volatility connectedness between NFTs, Defi assets and conventional cryptocurrencies. The major object of this research focuses on 3 markets: Conventional cryptocurrency, DeFi and NFT.2 Research scope e Spatial scope: 2 conventional cryptocurrencies, 2 DeFi assets, 2 NFT.
e Time span: The time selected for data collection is from May 11, 2021 to April 23, 2023 1.5 Research method This research calculated the return and volatility variables based on the data selected in Coinmarketcap. To test the return and volatility connectedness between assets which were selected as atest sample. The TVP-VAR variant of the elite networking method proposed by Diebold and Yilmaz (2009, 2012, 2014) was used to run the test results. Because, first, the TVP-VAR model is an empirical analysis model for volatility spillover.
Second, the model makes it possible to identify net risk generators and recipients and the spread of returns between the asset variables selected as samples, thereby knowing which assets are dominant or which are dominant or which are dominant by others. Third, TVP-VAR can self-estimate transmission fluctuations from a static point of view and change over time. Fourth, this model captures static return and volatility linkages and the impact of flash events on the volatility spillover effect that can be detected. Fifth, TVP-VAR can capture dynamic associations with a small and low-frequency data set because the econometric framework is based on the separation of variance of the predicted error.
Finally, TVP-VAR allows for a two-way volatility diffusion check as it can analyze the orientation from each variable to all other factors and analyze the overall volatility spread, analyzing the effect of return diffusion and net pair volatility using the model to consider the impact of assets on the market.6 Contribution of research The research will help to broaden reader's knowledge about 3 types of cryptocurrencies and how they are nominated and traded throughout digital financial markets. The information about cryptocurrencies provided comes from many reliable sources, which can be very helpful for the readers to have a deep insight about the definition of cryptocurrency, DeFi asset and NFT; their characters, their market situation and how they are traded and exchanged in the digital financial market. Readers will find information about acquiring the connectedness between some noticing cryptocurrencies and traditional assets from normal investment means, which will help them to find the answer of the question about how the cryptocurrencies react with the financial market's changes. The research also suggests some reliable sources of information and data about cryptocurrencies and financial assets, which can be useful for many different purposes.
This paper is one ofthe few empirical studies on the connectedness of the 3 types of cryptocurrency, DeFi asset and NTF. And also 8 suggests some reliable sources ofinformation and data about cryptocurrencies and financial assets so that readers can see the above markets more clearly.7 Structure of the study Chapter 1: Introduction Chapter 2: Literature review Chapter 3: Data method Chapter 4: Empirical results and discussion Chapter 5: Conclusion CHAPTER 2: LITERATURE REVIEW 2.1 Definition According to Kaspersky (2022), Cryptocurrency, sometimes called crypto-currency or crypto, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies don't have a central issuing or regulating authority, instead using a decentralized system to record transactions and issue new units. A digital payment system known as cryptocurrency doesn't rely on banks to validate transactions.
Peer-to-peer technology makes it possible for anybody, anywhere, to send and receive payments. Payments made using cryptocurrencies do not exist as actual physical coins that can be transported and exchanged; rather, they only exist as digital entries to an online database that detail individual transactions. A public ledger keeps track of all bitcoin transactions that involve money transfers. Digital wallets are where cryptocurrency is kept.
The first cryptocurrency was created in 2009 and is still the most well-known today: Bitcoin. Satoshi Nakamoto, a pseudonym for an author or group of authors whose identities are shrouded in mystery, introduced Bitcoin in 2008. According to Vranken (2017), Bitcoin is a digital, virtual currency without a physical counterpart like coins or banknotes. The bitcoin ecosystem is a network of users who interact with one another over the Internet utilizing the bitcoin protocol.
Users can store and transfer bitcoins to buy and sell items, trade bitcoins for other currencies, and more using the open source software program known as the bitcoin protocol. While processing transactions in a process known as bitcoin mining, bitcoins are issued in the network. A large portion of cryptocurrency interest is in trading for financial gain, with speculators occasionally sending prices stratospheric. The increased use of cryptocurrencies for cross-border remittances is expected to accelerate market expansion due to a reduction in consumer and exchange fees.2 Characteristic A cryptocurrency is a decentralized, digital, and encrypted form of money.
A cryptocurrency's value is not managed and maintained by a single entity like the US dollar or the euro. Instead, via the internet, these jobs are widely divided among users of a cryptocurrency.