The exchange rates of cryptocurrencies are known for their high volatility, which can be influenced by various factors such as announcements by large investors, celebrity endorsements, or financial crises. This paper aims to explain the reasons behind this volatility.The main contribution of this paper is the development of the concept of a “crypto multiplier.” This multiplier measures the response of a cryptocurrency’s market capitalization to the aggregate inflows and outflows of investors’ funds. By building on the quantity equation, the authors derive the value of the crypto multiplier. It is found that the multiplier is likely to be larger than one, meaning that an inflow or outflow of one dollar of investors’ funds can have a greater impact on the market capitalization of a cryptocurrency.
HomeDIGITAL ASSETS REGULATORYbis_asset_updateDeciphering the Effects of Cryptocurrency: Understanding the Crypto Multiplier