One factor, heavy tails and fragile pegs: evidence from a ten-year panel of cryptoassets and stablecoins
This paper analyzes a comprehensive ten-year panel of cryptoassets and stablecoins to demonstrate that these markets are characterized by heavy-tailed risks, extreme fragility, and a dominant single-factor structure that links asset volatility to stablecoin peg instability, challenging the notion that volatility is rewarded.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
In the world of modern finance, a new class of digital assets has emerged, moving from a fringe experiment to a massive industry held by banks, investment funds, and everyday people. These digital tokens, often called cryptoassets, are known for their wild price swings, where values can skyrocket or collapse in a single day. Alongside them sits a different kind of digital money, known as stablecoins, which are designed to hold a steady value, usually pegged to the US dollar, acting as a bridge between the chaotic crypto world and the traditional banking system. For anyone holding, managing, or watching over these assets, three questions are vital: how dangerous are the wild tokens, do they move together in a way that makes them useless for spreading risk, and are the stable coins truly stable?
A team of researchers from universities in Portugal set out to answer these questions with a level of detail and time span that had never been attempted before. Instead of looking at a handful of coins over a few years, they gathered a massive record of daily prices for 45 different cryptoassets and 10 different stablecoins, stretching from the beginning of 2016 to the spring of 2026. This dataset covered over 155,000 daily observations, capturing three full market cycles, including the catastrophic failures of major platforms in 2022 and the banking stress of 2023. The researchers treated this data with extreme caution, auditing it line by line to ensure that a single error in a computer file or a glitch in a price feed did not distort their findings. They wanted to see if the patterns seen in small, early studies held true when the market grew up and faced its toughest tests.
What they found was a picture of a market that is far more connected and risky than many people realize. First, they confirmed that the wild price swings are not just a feature of a few bad apples but a fundamental trait of the entire group. Every single cryptoasset they studied had a distribution of returns that was "heavy-tailed," a statistical way of saying that extreme events—both massive gains and devastating losses—happen far more often than standard financial models predict. In fact, 42 out of the 45 cryptoassets they tracked lost more than 90 percent of their peak value at some point. This means that for most of these assets, holding on through the highs and lows resulted in near-total loss, and the promise of high returns did not come with a reward for taking on the volatility. In fact, the assets that were the most volatile tended to suffer the deepest crashes, not the biggest profits.
Perhaps the most surprising discovery was that these digital assets do not offer a way to spread risk. In traditional investing, you buy different stocks so that if one falls, another might rise, protecting your money. The researchers found that this does not work in the crypto world. Every single pair of the 45 assets they studied moved in the same direction at the same time; when one went up, they all went up, and when one crashed, they all crashed. This is because the entire market is driven by a single, dominant force, much like a single wind moving a whole flock of birds. This level of unity did not always exist. The researchers pinpointed a specific moment in mid-2017, during a massive boom, when the market shifted from being a collection of separate, loosely connected coins to a tightly integrated system where everything moved as one. Since that shift, the market has remained in this state, meaning that during times of stress, diversification is an illusion.
The story of the stablecoins, the digital dollars, was equally revealing. While they are designed to stay exactly at one dollar, the researchers found that their stability varies wildly depending on how they are built. Some coins, backed by real cash reserves and strong systems, stayed incredibly close to their target, deviating by only tiny fractions of a cent on average. Others, particularly those backed by other risky digital assets or lacking clear reserves, drifted much further away. The researchers discovered that looking at the average deviation is misleading. A coin might look very stable on average, but if it has a "heavy tail," it means it is prone to sudden, violent breaks from its peg. The study showed that the largest deviation for any coin was between 9 and 204 times its average deviation. This means that a coin that seems safe most of the time can still experience a catastrophic failure, and the average number hides this danger.
The researchers also highlighted how fragile our understanding of these markets can be when the data is not checked carefully. They found that a single error in a price feed, lasting just nine days, could make an asset look 10 times more risky than it actually was. Similarly, a single day of extreme market panic could create a spike in the measured connection between assets that vanished as soon as that day passed. These findings suggest that the way we measure risk in this field needs to change. Instead of relying on simple averages or standard models that assume normal behavior, investors and regulators need to look at the tails of the distribution—the extreme, rare events—and understand that the market is driven by a single, powerful force that leaves little room for safety in numbers. The study concludes that for anyone navigating this space, the reality is that the market moves as one, the risks are extreme and heavy, and the stability of digital dollars depends entirely on the specific design of each coin, with some being far more fragile than others.
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