In terms of its structure and organization, the cryptocurrency market is a rather young and a very specific financial market. Due to its relatively short history, it is difficult to fully analyze the cryptocurrency market (it appeared only in 2009), which makes this task even more attractive for researchers.

However, even at this point we can trace some stages of its evolution, including those related to the development of cryptocurrency market institutions. Obviously, these processes were accompanied by the transformation of behavior patterns of the cryptocurrency market players. The study of these models makes it possible to test a number of theories of behavioral finance, and to determine the general and specific features of the cryptocurrency market functioning in comparison with other financial markets.

According to Marina Malkina, Professor at the Department of Economic Theory and Methodology of the Lobachevsky University's Institute of Economics and Entrepreneurship, of special interest for researchers is the degree of players' reaction to positive or negative news during  different periods of market development (upward or downward price rally), manifestation of players' herd instincts in the transition from steady development to market boom, as well as the effects of learning when bullish and bearish trends repeat.

"We analyzed the dynamics of the cryptocurrency market in relation to significant institutional changes and the accompanying news background. The inclusion in the study of a long chronological period (from November 2014 to November 2019) allowed us to cover in our study different stages of the development of the cryptocurrency market. We also assessed its later fluctuations  that occurred, as a rule, with negative news background, which was not fully taken into account in previous studies," Marina Malkina explains.

Nizhny Novgorod scientists pay special attention to the effect of asymmetry in the reaction of the cryptocurrency market to news. They attempt to answer the question whether it is the good or bad news background that is more likely to form the fluctuations of the cryptocurrency market and how this is related to the stages of its development.

"We used a combination of methodological techniques – from the sliding autocorrelation function of returns and statistics of search queries in Google Trends and Wikipedia Page Views to quite advanced models of conditional volatility with switching of market modes (Markov-Switching GARCH-models)," comments Vyacheslav Ovchinnikov, lecturer at the Department of World Economy and Customs of the UNN Institute of Economics and Entrepreneurship.

"We have also analyzed the transformation of herd instincts of cryptocurrency market participants, trying to answer the question of how small investors are inclined to borrow the trading practices of larger agents during the hype, and whether they are able to revise their behavior as they accumulate practical experience and knowledge. In this case, we used heterogeneous autoregressive models of realized volatility (HAR-RV-J-models) as our tool", Vyacheslav Ovchinnikov continues.

As a result of the research, Lobachevsky University scientists have proved the dependence of the asymmetry effect on the direction of market movement (upward or downward trend) and the amplitude of its fluctuations (high or low volatility).

In particular, with the rapid growth in the value of cryptocurrencies and the formation of a bullish trend, investors ignored the bad news and underestimated the risks of losses. During this period, there was an effect of inverse (as accepted on the stock market) asymmetry of market reaction. With a bearish trend and falling market, investors became overly sensitive to bad news (there was a traditional asymmetry in this case). However, when the market started intensive movements in principle (as manifested in the growth of volatility), there was practically no asymmetry in the reaction to good and bad news.

According to the researchers, small investors' behavior also varied at different intervals of the study period. It follows from the results of the study that before January 2017 (before the market boom or hype) small speculators were more likely to follow their own trading strategies, during the hype they borrowed the trading practices of "heavyweight" players.

In the course of the research, scientists observed some signs of small investors' learning in the course of trading. Over time, the small investors were already less susceptible to provocations by major players, and this is what prevented the 2019 small market rally from surpassing its counterpart in 2017 in terms of both return oscillations and duration.

Lobachevsky University researchers have proved that both the asymmetric reaction of the cryptocurrency market to the news that changes depending on the market conditions, and the pronounced herd behavior of the participants testify to the inefficiency of the cryptocurrency market (especially during its immaturity), thus confirming a number of basic concepts of behavioral finance.

The results obtained in the course of the research may prove useful for financial markets' participants in building their own strategies for trading in cryptocurrency assets.

The research results are reflected in the following publication:

Marina Yu. Malkina, Vyacheslav N. Ovchinnikov. Cryptocurrency Market: Overreaction to News and Herd Instincts // Ekonomicheskaya Politika, 2020, Vol. 15, No. 3, pp. 74-105. DOI: 10.18288/1994-5124-2020-3-74-105. Scopus (Q2, Finance)