Key Takeaways:
Key Takeaways:
The cryptocurrency and digital asset market has had its best 3-month gain since 2017 (measured by overall market capitalization change)
Bitcoin (BTC) exhibited a high average correlation with other cryptoassets in the first quarter of 2019, but its correlation dropped significantly in the second quarter, during which time the price of Bitcoin rose by 300%, accounting for The rate 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 have a lower average correlation than cryptocurrencies that are listed on Binance.
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.
Correlation between two cryptoassets that are functionally similar (e.g. XRP vs. XLM) appears to be above average
Cryptoassets publicly listed 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.
1. Overview of market performance in the second quarter of 2019
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.
Last quarter, the total value of the crypto asset industry rose 139%, 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 the second quarter of 2019, the second-highest quarterly gain in history since 2014, behind only the bull market in the fourth quarter of 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."
——Source: Investopedia
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 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.
In this report, I selected 30 encrypted assets as a sample, mainly based on the average market value ranking from January to June 2019.
In the next section, we explore the correlation in the second quarter of 2019 while drawing observations from the dataset.
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Sources: Binance Research, CoinMarketCap
The overall correlation between the above-mentioned top digital assets by market value is still relatively high, and the correlation between most of these assets and other encrypted assets is above 0.5.
Furthermore, no negative correlation exists between any pair of crypto-assets, suggesting that idiosyncratic factors remain relatively insignificant in the performance of individual crypto-assets, and that individual crypto-asset prices are still significantly affected by changes in the overall market (as noted in our previous report). described).
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): Numerous rumors of its delisting from large exchanges (Binance and Kraken delisted BCHSV/BSV) have been circulating, which has led to abnormal price fluctuations independent of other projects in the entire market.
Binance Coin (BNB): BNB went from being the largest ERC20 token on Ethereum to being native to Binance Chain, and continued to rise in price in Q1 and Q2 2019. Other Binance-related news and events have also boosted 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 trading platforms around the world development (for example: Binance Singapore trading platform).
In addition to specific project-related catalysts, our March 2019 report also identified "consensus mechanism design" and "exchange listing" as key factors affecting the relevance of specific cryptoassets. During our review of these catalysts, we observed some similar effects in the second quarter of 2019.
The “Binance Effect”: Tezos (XTZ), Doge (DOGE) and Bitcoin SV (BSV) all exhibit lower correlations with other cryptoassets included in the dataset than other cryptoassets included in the dataset. 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: Compared to our previous Q1 report, consensus mechanism design still appears to affect correlations between assets. Specifically, in Q2 2019, on average, Proof-of-Work assets were more correlated with each other than with non-Proof-of-Work assets.
Interestingly, 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. If Litecoin (LTC) implements MimbleWimble in the next 8, it will be very interesting to closely monitor the subsequent correlation of Litecoin with the two aforementioned cryptocurrencies.
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."
3. Quarterly horizontal comparison
3. Quarterly horizontal comparison
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Source: Binance Research, CoinMarketCap
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:
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:
Some interesting phenomena can be found from the above table: .
The correlation between Bitcoin (BTC) and other cryptoassets has decreased in the second quarter of 2019 compared to the first quarter. The correlation between Bitcoin 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 “safety transfer” of cryptoasset investors during early bull market conditions, a behavior we may explore further in a follow-up report.
Compared with the first quarter of 2019, the correlation between other 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) have seen the largest increases in average correlation with other cryptocurrencies.
On the other hand, Bitcoin SV (BSV) 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 caused by 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.
4. A quick overview of Launchpad digital asset correlation
4. A quick overview of Launchpad digital asset correlation
From January to March 2019, Binance Launchpad successfully completed three IEOs (Initial Exchange Offering):
Issued on February 3, 2019BitTorrent (BTT)
Issued on March 2, 2019Fetch.AI (FET)
Issued on March 24, 2019Celer Network (CET)
This subsection analyzes the correlation strength in the second quarter (March 31-June 30, 2019) of these cryptocurrencies that conducted IEOs in the first 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 cryptocurrencies with the largest market capitalization on June 30, and 5 projects that listed tokens on Binance before the start of the second quarter of 2019. Then the correlation was calculated using the closing price rise and fall of each item from March 31st to June 30th.
Figure 5-Correlation matrix of cryptocurrency daily yields issued on Launchpad in the second quarter of 2019 (in USD):
Most notably, all 3 projects conducting IEOs in Q1 2019 were highly uncorrelated with other cryptocurrencies in the market, exhibiting the lowest correlation with high market cap cryptocurrencies. This effect is more evident in the recent projects launched on Launchpad, which 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, the average correlation between 3 IEO projects and all other cryptocurrencies in the cohort was 0.32, while the average correlation of the other 9 projects was 0.58.
We can clearly see that although the initial offerings of the 3 recent IEO projects were priced in BNB (at least in part), they also had a low correlation with BNB, averaging 0.22. Most interestingly, out of the three, BitTorrent (BTT) was the only project to accept both BNB and Tron (TRX) cryptocurrencies for fundraising at launch, yet it had the highest correlation with BNB (exactly 0.27).
The correlation between the three IEO projects is relatively high compared to 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 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 .
Binance Research provides investors in the cryptocurrency field with in-depth analysis and data-driven insights on digital assets through objective and neutral institutional-level research 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 Bitcoin's 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.
This report is for information purposes only and should not be relied upon for investment decisions, nor should it be construed as a recommendation to engage in investment transactions or as an investment strategy recommendation for any financial instrument or its issuer. This report published by Binance Research is not related to investment, tax, legal, financial, accounting, consulting or any other related services advisory services, nor is it a recommendation to buy, sell or hold any assets. The information contained in this report is based on sources believed to be reliable, but its accuracy or completeness is not guaranteed. Any opinions or estimates expressed herein reflect judgment as of this date and are subject to change without public notice. Binance Research shall not be liable for any direct or indirect damages arising from the use of this publication/newsletter or its contents.
Binance Research provides investors in the cryptocurrency field with in-depth analysis and data-driven insights on digital assets through objective and neutral institutional-level research reports.
[1]March 20, 2019 report "Are Cryptoassets Highly Correlated?" "https://info.binance.com/en/research/marketresearch/crypto-correlations.html
[2] https://www.coindesk.com/smart-contract-startup-tapped-by-google-as-blockchain-partner
[3] https://medium.com/matic-network/matic-partners-with-chainlink-15f9d5cb87df
[4] https://coingape.com/fake-chinese-news-binance-rumor-bitcoin-sv-prize/
[5] https://www.coindesk.com/kraken-exchange-joins-binance-shapeshift-in-delisting-bitcoin-sv
[6]We explored the opposite phenomenon in our previous report on correlations, where Stellar’s listing on Binance resulted in a higher correlation between Stellar and Binance-listed cryptocurrencies.
[7]Is there a high correlation between the rate of return shown by this correlation matrix and "Encrypted Assets?" published on March 20, 2019. 》There is a 2-month overlap in the yields analyzed (January and February 2019)https://info.binance.com/en/research/marketresearch/crypto-correlations.html
[8] https://blog.kraken.com/post/2274/kraken-is-delisting-bsv/
[9] https://www.binance.com/en/support/articles/360026666152-Binance-Will-Delist-BCHSV
[10]Read more in our first report on decentralized finance and lending platforms and protocols.https://info.binance.com/en/research/marketresearch/defi-1.html
[11]Launchpad projects (such as MATIC, Harmony, and Elrond) in the second quarter of 2019 will be analyzed in the third quarter report.
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