Cross-sectional Capitalization Dynamics of the Cryptocurrency Market: A Markov Chain Analysis

Utilizing approximately 3,000 cryptocurrencies since market inception, we investigate the mobility properties of the market. Using a Markov Chain model, we estimate the Transition Matrix, describing the probabilistic structure of cross-sectional capitalization transitions. We further apply various indices providing the anatomy of cross-sectional dynamics. Additionally, we compare the early cryptocurrency market period to the more recent era, investigating whether there are any discernible changes in the mobility structure. We find that persistence, in the first decade of the cryptocurrency market’s operation has been substantial. Moreover, mobility (persistence) is found to be lower (higher) in the recent era of the market. Also, we document that the exit probability monotonically decreases with the cryptocurrency's capitalization. Exit probability exhibits a clear reduction in the recent market era. Overall, the results of this study can also be interpreted as signs that the cryptocurrency market has entered into a maturity phase.