By Edward W. Mandel
It’s hard getting rich arbitraging currencies. Notice I didn’t say “.” Currencies in general, and reserve currencies in particular, tend to stay within very close bands with one another barring some catastrophe. That’s because they’re all behaving like stores of value which is, after all, their job.
It’s not much different with crypto, which is still trying to prove its capacity to value. That role has been taken on by such stablecoins as tether and gemini which are pegged 1:1 to the U.S. dollar, or stasis and biteuro which match the euro, or dai which represents a basket of reserve currencies. Meantime, remains the digital asset with the highest market cap by far, and quickly fell into lockstep with it in terms of relative value since ether launched in 2015. You’re more likely to make money arb the dollar-denominated price of on against its dollar-denominated price on than you are to buy it low on with then sell it for on the same exchange.
But that might be changing. No Exchange is going to tell you what or how or how much to trade. But we’re in this game too, and we try to keep up with trends. And from what we’re seeing now, don’t seem to be like other currencies at the moment. Instead, they might be starting to trade more like equity, with each appreciating and depreciating relative to one another and relative to reserve currencies — based on their unique fundamentals, with technically-driven traders anticipating these movements based on price and volume trends.
The report
Someone at with a lot of time on their hands wrote up an 11-page research paper on this, but the net-net of it is that large-cap crypto assets declined last year in terms of correlation with , but increased in terms of correlation to the dollar.
Proceeding from the caveat that 2018 wasn’t a typical year for crypto market and that the 15-month period that informed the study should prompt us to further analysis over longer time horizons, the report noted that the rise of stablecoins among pairs — at the expense of — had a lot to do with this trend.
A lot, but not everything. Where the trade and how their blockchains are structured have a role in correlations as well.
“Additional factors beyond project-specific and catalysts may influence the strength of correlations among cryptoassets,” according to the authors, including the “’ Effect’, [that is,] digital assets listed on oftentimes have higher correlations among themselves. [Also,] … the type of consensus mechanism could impact the correlation between returns of cryptoassets (e.g., returns of PoW coins exhibited higher correlations amongst themselves than with non-PoW coins).”
But despite the incipient diversion of values, the report points out the obvious: remains the “bellwether of the industry” and a high degree of correlation continues.
This is a good thing
The trend toward decoupling from augurs positive signs for the crypto market in general. I agree with what journalist Cole Petersen says about it. (For such a young kid, he strikes me as really insightful.
“Analysts and investors alike have long viewed the notoriously between nearly all as a sign of the market’s immaturity, as only seldomly do individual move on their own accord regardless of the overall market conditions,” Petersen writes in . “The [] report importantly notes that the correlation of returns between various and over the past three months has been fading significantly.”
As players come to recognize the crypto market’s growing maturity, you’d expect sidelined money to be introduced — or reintroduced.
What about ICOs?
Still, those founders seeking to fund their projects via ICOs of security or utility won’t be among the first to benefit.
A explains how ICOs tend to remain tightly correlated with .
“Our assumption is that there will be a positive correlation with returns on other because ICOs tend to rely on a similar infrastructure (many ICOs rely on , for example). At the same time, the correlation cannot be too high given that the business model of or , as alternative payment systems or platforms, is quite different from the business models of most ICOs,” according to authors Antonio Fatás and Beatrice Weder di Mauro. “We study this correlation empirically by collecting data on the pricing of the largest 50 ICOs and test whether the behaviour of ICO returns are correlated to the returns of and . If ICOs are truly pricing their unique business models, we would expect their returns to be idiosyncratic with low correlations. If, on the other hand, they are simply seen as an investment vehicle to generate excess returns based on a ‘ bubble’, we would expect them to be highly correlated to prices of the major .”
I won’t keep you in suspense. Fatás and di Mauro found little correlation prior to the crypto bubble bursting in early 2018 but, from that point forward, the correlation between ICO values and the two largest tightened. Then they remained tight even as markets stabilized.
The authors leave it to us to explain why that would be. The “benign” explanation is that investors tend to conflate these two new, technologically linked yet economically distinct markets. As they mature, investors will become more savvy and be able to parse the differences between ICOs and true such as and ether.
The other interpretation “is that ICOs were just one of the children of the hype and are likely to share the fate of major .”
The view of the team is that the explanation isn’t an either-or. It could be a blend of both. As far as I’m concerned, we established an entirely new asset class, , 10 years ago when debuted. Since then, we’ve launched two more in a related space — security and utility . These assets have similar code, sure, but they are very different from each other. And within these classes, each issuer has their own use case and, thus, their own value proposition. And I’m not even talking about crypto futures, crypto EFTs, non-fungible , central bank digital assets or any number of other different flavors of digital assets.
It takes sophisticated investors to parse all these distinctions. As these assets diverge in terms of their relative strength indexes, there will be more and more need for dexes that allow for the kind of nuanced thinking that informs well-considered — and well-hedged — transactions. And, as the universe of sophisticated investors grows, we stand ready to welcome them to our platform very soon.
Edward is an Ernst and Young Entrepreneur of the Year Finalist, Enthusiast and visionary behind many successful organizations. An avid entrepreneur, Edward has a knack for designing distinctive business models complemented with superior technology to deliver unparalleled service and profitability. Edward also has been advising and consulting for various successful technology and ICO projects and recently launched his own BQT.IO P2P exchange helping traders connect with each other to leverage their crypto assets.
BQT.IO has been in development since March 2017 and its ICO launched September 18. The information can be found online at BQT.io, on Telegram @BQTCommunity and on Twitter as @bqt_ico.
Published at Sun, 07 Apr 2019 08:02:39 +0000