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Abstract
Given the potentially high rewards in the cryptocurrency market, many studies have explored the use of mathematical, statistical and machine learning models to understand and predict the behavior of cryptocurrencies. However, there remains a significant lack of understanding of the underlying market dynamics. Other studies have explored the application of complex systems modeling to gain a deeper understanding of the cryptocurrency market and its dynamics. This paper explores the use of System Dynamics (SD) modeling to gain insight into the market mechanisms of Bitcoin. The aim of this research is to holistically investigate the intricate relationships among various factors influencing the dynamics of the Bitcoin market. The SD model was developed using AnyLogic. It breaks down the Bitcoin market into five interlinked subsystems: Demand, Supply, Infrastructure, Users, and Price. Sensitivity analysis was then conducted on three key parameters: energy costs, market sentiment, and the regulatory atmosphere. The results showed the feasibility of using SD as a tool for modeling Bitcoin market and testing market behavior under different scenarios. The study highlights the importance of considering a wide range of factors in predicting cryptocurrency prices and the significance of capturing the nonlinear interrelationships among these factors. It contributes to a better understanding of the mechanisms behind the Bitcoin market and can serve as a decision support tool for investors, analysts, and financial engineers. Such a support tool helps financial engineering practitioners to navigate the intricate cryptocurrency market, ultimately contributing to more robust and sustainable engineering management strategies in the financial domain.
Keywords
System Dynamics, Complex Systems Modeling, Cryptocurrency, Bitcoin.
Introduction
There is a growing interest in the cryptocurrency market due to the remarkable growth of Bitcoin and the introduction
of various new cryptocurrencies. As of January 1, 2023, Bitcoin price has experienced a return of more than 100,000% in the past ten years. However, the cryptocurrency market is notorious for high volatility and numerous studies have explored the use of mathematical and statistical models to understand and predict the behavior of cryptocurrencies. Despite the studies that have been done, there remains a significant lack of understanding of the underlying dynamics of the cryptocurrency market.
The cryptocurrency market is complex and influenced by macroeconomic factors, market sentiment, and regulation, among other factors. Additionally, herding and...