Copula functions and an application to cryptocurrencies

Cryptocurrency that we hear frequently today first entered our lives in 2009 with Bitcoin. While cryptocurrencies are highly volatile, their risk levels are mostly unknown. It is important for investors to know the risk and tail characteristics. For this reason, copula functions, which are widely used in financial data, are used to model the dependency structure between cryptocurrencies. For this purpose, the 4 cryptocurrencies with the largest market value (Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), Ripple (XRP)) are selected. The most suitable copula functions are determined for the dependency structure between these crypto currency pairs. As a result of the analyses, it is showed that the dependency structure between BTC-ETH, BTC-BNB and BTC-XRP crypto currency pairs is explained by Survival Tawn-2 copula. Then, the dependency structure between ETH-BNB is explained by Frank copula. Moreover, dependency structure between ETH and XRP is explained by Survival BB8 copula and the dependency structure between BNB-XRP is explained by the Survival Gumbel copula. Thus, the study makes a contribution to the literature in terms of giving an idea about the risks and tail dependence of cryptocurrencies. The 4.2.2 version of the open source R software is used in this study.