key points
key points
- The cryptocurrency and digital asset market had its best 3-month gain since 2017 (measured by overall market capitalization change)
- Bitcoin (BTC) exhibited a high average correlation with other crypto assets in the first quarter of 2019, but its correlation decreased significantly in the second quarter, during which time, the price of Bitcoin increased by 300%, and the market capitalization The share reached more than 60%, setting a new high for the year.
- In the second quarter of 2019, cryptoassets affected by more significant idiosyncratic factors (such as major news events), such as BNB, LINK or BSV, exhibited lower average correlations with other cryptoassets.
- This article explores the “Binance Effect” again, as cryptocurrencies that are not listed on Binance are less correlated on average than cryptocurrencies that are listed on Binance.
- Same as in Q1, Proof-of-Work cryptoassets are more correlated with each other than with non-Proof-of-Work (POW) cryptoassets. Interestingly, the average correlation of proof-of-work cryptocurrencies fell the most in the second quarter compared to January-March 2019.
- Other factors include:
- Privacy coins are more correlated with each other than average.
- The correlation between two cryptoassets that are functionally similar (e.g. XRP vs. XLM) appears to be above average
- Cryptoassets listed publicly on Binance Launchpad are, on average, less correlated with each other, likely due to the fact that they are influenced by more idiosyncratic factors. However, Fetch (FET) and Celer Network (CELR), two projects that launched IEO (Initial Exchange Offering) in March 2019, showed a very high correlation (0.87)
In the financial industry, analysts and fund managers widely use correlation to efficiently allocate and diversify their assets across various sectors and industries. While the cryptoasset industry is still in its infancy, these metrics are increasingly being scrutinized and analyzed more frequently by all cryptoasset stakeholders, whether institutional or retail.
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1. Overview of market performance in the second quarter of 2019
Despite a pullback in the final days of the second quarter, the overall performance of the cryptoasset market in the first two quarters of 2019 was very strong.
The total value of the cryptoasset industry rose 139% last quarter, the third fastest quarter for the sector since 2014. In absolute dollar terms, the total dollar value of cryptoassets increased by approximately $199 billion in Q2 2019, the second-highest quarterly gain on record since 2014, behind only the bull market in Q4 2017. rise.
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Source: Binance Research, CoinMarketCap
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2. Q2 2019 Correlation Snapshot
In statistics, correlation measures the strength of a linear relationship between two random variables on a scale of -1 to 1.
In general, assets with a correlation coefficient above 0.5 or below -0.5 are considered to have a strong positive/negative correlation. Conversely, a correlation coefficient close to 0 indicates a lack of linear relationship between two variables, which in this analysis refer to the returns of two assets.
If the returns of two assets exhibit a positive correlation, it indicates that the two assets tend to move in the same direction and therefore face similar risks. However, if the yields of two assets show a negative correlation, it indicates that the two assets fluctuate in opposite directions, so one of the assets can be used to hedge the risk of the other.
This report selects 30 encrypted assets as samples, mainly based on the average market capitalization ranking from January to June 2019.
In the next section, we explore the correlation in the second quarter of 2019, drawing observations from the dataset.
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Source: Binance Research, CoinMarketCap
The overall correlation between the above-mentioned top digital assets by market capitalization is still high, and the correlation between most of them and other encrypted assets is above 0.5.
In addition, there is no negative correlation between any pair of encrypted assets, which shows that the impact of specific factors on the performance of individual digital assets is still relatively slight, and the price of individual encrypted assets is still greatly affected by changes in the overall market.
However, analysis of several idiosyncratic factors and events suggests that they may have had an impact on the correlation of specific cryptoassets in Q2 2019.
Chainlink (LINK): In June, the company announced that Google would integrate Chainlink for smart contract functionality. Matic Network, which successfully completed its token sale on Binance Launchpad, also announced a partnership with Chainlink.
Bitcoin SV (BSV): The founder’s words and deeds were inappropriate, rumors spread, and the product was delisted by several large trading platforms (such as Binance and Kraken delisting BCHSV/BSV), which led to its emergence independent of the entire market Unusual price fluctuations.
Binance Coin (BNB): BNB went from being the largest ERC-20 token on Ethereum to native to Binance Chain, with prices continuing to rise throughout the first half of 2019. Other Binance-related news and events have also contributed to increased interest in Binance Coin, such as the release of new features such as spot leveraged trading on centralized exchanges (eg: OCO orders), and new fiat currency trading around the world Platform development (Binance Singapore, etc.).
In addition to specific project-related catalysts, we previously also considered consensus mechanism design and exchange listing as key factors affecting the relevance of specific encrypted assets. In reviewing these factors, we observed some similar effects in the second quarter of 2019.
The “Binance Effect”: Tezos (XTZ), Doge (DOGE) and Bitcoin SV (BSV) all show low correlations with other cryptoassets. Interestingly, the delisting of Bitcoin SV from Binance resulted in very low correlations between it and other cryptoassets in Q1 and Q2 2019.
Consensus Mechanism: Consensus mechanism design still appears to affect correlations between assets compared to previous reports. On average, in Q2 2019, Proof-of-Work assets were more correlated with each other than with non-Proof-of-Work assets.
In addition, from the dataset, we also observed other specific factors affecting the correlation (see Figure 3):
Privacy Factor: The correlation between Dash (DASH) and Monero (XMR) is extremely high (0.85), a trend that seems unmistakable given that both are focused on protecting privacy. Should Litecoin (LTC) implement MimbleWimble in the future, it will be interesting to closely monitor Litecoin’s subsequent correlation with the two aforementioned digital assets.
Functionally similar: Ripple and Stellar Lumens (XLM) exhibit a very high correlation (0.87). Although Stellar was originally created based on the Ripple protocol, its code was quickly forked and modified. However, the two cryptoassets still share several similarities, as they both aim to reshape the global remittance industry.
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3. Quarterly horizontal comparison
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Source: Binance Research, CoinMarketCap
Most of the correlations are similar to those described in our March 2019 report on crypto asset correlations. Notably, however, the average correlation between BTC and all other major cryptoassets fell from 0.73 to 0.61 in the second quarter.
On the other hand, the average correlation between other cryptoassets has remained stable between 0.57-0.58 in Q1 and Q2. However, the respective average correlation coefficients of these cryptoassets changed, as shown in the table below:
Figure 5: Q1-Q2, change in average correlation
Some interesting phenomena can be found from the above table:
The correlation between BTC and other cryptoassets decreased in the second quarter of 2019 compared to the first quarter. The correlation between BTC and altcoins has decreased, with an average correlation decrease of 0.11.
As mentioned above, the overall market value of encrypted assets rose by 139%, while the total market value of altcoins (including stable coins) increased by only 71% during the same period. This is likely due to the flight to safety of cryptoasset investors during early bull market conditions.
Compared with the first quarter of 2019, the correlation between encrypted assets using the proof-of-work mechanism (such as: BCH, DOGE, BTC, ETC, BTG) and other encrypted assets has decreased. Cryptoassets using the proof-of-work mechanism did not show a higher correlation with each other, and the correlation with other cryptoassets showed a larger decline.
Tezos (XTZ), Ontology (ONT) and TRON (TRX) saw the largest increases in average correlation with other digital assets.
BSV, on the other hand, saw the largest drop in average correlation, most likely due to its delisting from Kraken and Binance. Interestingly, the correlation between Dogecoin (DOGE) and other crypto-assets has also decreased further, but it still maintains a high correlation (0.55) with Litecoin, which may be due to the merged mining of these two currencies.
Despite some structural changes from Q1 to Q2 2019, the correlation between most cryptoassets remains high, with an average correlation of 0.57 in Q2.
Therefore, within the encrypted asset industry, it is still very difficult to achieve risk diversification by only taking long positions in encrypted assets with large market capitalization.
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4. A quick overview of Launchpad digital asset correlation
From January to March 2019, Binance Launchpad successfully completed three IEOs (Initial Exchange Offering):
On February 3, 2019, BitTorrent (BTT) was issued;
On March 2, 2019, Fetch.AI (FET) was released;
On March 24, 2019, Celer Network (CET) was released.
This subsection analyzes the strength of correlations in the second quarter (March 31-June 30, 2019) of these digital assets that conducted IEOs in the previous quarter.
Although the target niches of these projects are unrelated (BitTorrent focuses on decentralized file sharing, Fetch on advanced data marketplaces, and Celer on second-layer scalability), they all operate in similar market conditions. The ones that were put on the shelves entered the open market immediately after Binance completed the public sale.
We selected the 7 digital assets with the largest market capitalization on June 30, and 5 projects that launched token sales on Binance before the start of the second quarter of 2019. Correlation calculations were then performed using the closing ups and downs of each item from March 31st to June 30th.
Figure 6: Correlation matrix of daily yields of digital assets issued on Launchpad in the second quarter of 2019 (in USD)
It is obvious that the 3 projects that conducted IEO in the first quarter of 2019 are all highly uncorrelated with other digital assets in the market, and the correlation with high market capitalization digital assets is the lowest.
This effect is more evident in the recent launchpad projects, but it is quite different from the two projects Bread (BRD) and Gifto (GTO) that first issued tokens on Binance launchpad at the end of 2017. On average, 3 IEO projects had an average correlation of 0.32 with all other digital assets in the cohort, while the other 9 projects had an average correlation of 0.58.
We can see that although the 3 recent IEO IPOs were priced in BNB (at least in part), they also had a low correlation with BNB, averaging 0.22.
Interestingly, out of the three, BitTorrent (BTT) was the only one to accept both BNB and TRON (TRX) digital assets for fundraising at launch, yet it correlated the most with BNB ( exactly 0.27).
The correlation among the 3 IEO projects is relatively higher than the correlation between recent IEO projects and non-IEO projects, and the lowest correlation is BTT and FET (0.48). One of the outliers is between Fetch and Celery, which exhibited a surprisingly high correlation of 0.87 in Q2 2019. This is likely due to the fact that they all launched in March under similar market conditions, while BitTorrent was launched a full month earlier than them.
5 Conclusion
5 Conclusion
The average correlation between Bitcoin and most other large-cap cryptoassets decreased in Q2 2019 compared to Q1 2019, however, overall correlations between other cryptoassets remained high .
The idiosyncratic factor is seen as a key factor influencing the strength of the correlation between cryptocurrencies and digital assets, which is consistent with the findings of several of our previous reports.
It is possible that the significant decline in correlation between Bitcoin and other assets is caused by a flight-to-quality underlying investor behavior, which is similar to the increase in Bitcoins market share at the beginning of the 2017 bull market. The situation is very similar.
This report focuses on recent changes in the relevance of the cryptocurrency industry and provides an analysis of future trends to help assess whether the current cryptocurrency market environment is similar to what has been seen in traditional financial markets during the early stages of the bull market.
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