How good is the idea of diversification of cryptoperthite?
Perhaps the most common misconception on the cryptocurrency market is the idea of the dominance of bitcoin. It is expressed as a share of total BTC capitalization of cryptocurrencies. To track this indicator on major sites like CoinMarketCap. Although in itself this figure has a right to exist, the problem is that it generates a misconception about the structure of the cryptocurrency market.
The actual impact of bitcoin is much larger and covers the entire market — it will confirm any trader watching the impact of the first cryptocurrency on the rest of the portfolio.
In 2017 began the next bullish trend in the cryptocurrency market. As a result, almost all altcoins have become the planet with the giant star in the form of bitcoin center. Correlations spiked, and only a Ripple showed some resistance.
At the end of 2017 Ripple reacted sharply to the rise in value of bitcoin to its rise in price. Last year, the cryptocurrency companies, forming partnerships with many financial institutions in the world, turned out to be moderately resilient to the fluctuations of bitcoin.
Its competitor, Stellar, also demonstrated the independence of the correlation between the two Althingi was 0.9, which indicates the same attitude of investors. In other words, buyers equally believe (or not believe) in Ripple and Stellar.
The market crash
In 2018, the trend has changed. In place of the excitement came caution. However, this does not affect the correlation between the cryptocurrency, which has even increased. Now altcoins fell behind bitcoin.
In the period from January to September, their correlation with BTC never dropped below 0,85. Interestingly, during the bull market 2017 litecoin and ether were leaders in correlation with bitcoin, but in 2018 they were among the Laggards. It is unclear whether this is due to the fact that they are traded on Coinbase or some other factors.
In 2018, when all the major cryptocurrencies has demonstrated a very strong correlation with bitcoin (>0,7), EOS acted as an apostate.
In 2017, immediately after the appearance, EOS showed a more close relationship with the bitcoin quotations. The culmination of the ICO, which lasted a whole year — from June 2017 to June 2018, — was the launch of the core network. Despite the ambiguous attitude to the project, it is undeniable that many investors are interested in the EOS and have invested their money (only attracted about 4 billion dollars).
In 2018, the EOS was one of the few coins that has managed to remain above the prices in January. If I had to find out the cause of this behavior, I would say that it is partly due to a combination of several bitcoin correction within the bear market and the long-term nature of the ICO EOS.
For every rise in the price of bitcoin in 2017 EOS reacted even more rapid growth. In April 2018, there was another surge of quotations, however, he in no way was connected with the dynamics of bitcoin — has affected the approach of the deadline the ICO and launch preparations of the core network.
Critics can argue with my conclusions and say that the whole growth of EOS is associated with the figure of the founder and leader Dan Larimer. However, in this case similar differences should be observed in other cryptocurrencies such as Bitcoin and ether Cash, who also have their own leaders (and consequently, acne Buterin and Roger Ver).
But if we analyze the dynamics of the ether and Bitcoin Cash, you notice their high correlation with the prices of bitcoin. Those who believe in the cult of personality of the founder, will have to explain why EOS and Dan Larimer he is stronger than other cryptocurrencies.
Given the current instability of the market no one knows what will be the correlation of cryptocurrency in a year, a month or even a week.
The main conclusion, perhaps, is that the idea of building a diversified cryptocurrency portfolio to reduce the risk is completely unfounded. A portfolio can be diversified, for example, to increase its profitability, however, the high correlations show that the purchase of other coins did not reduce his risk bitcoin leads the market. Although I did not conduct a formal analysis of its impact, my personal experience suggests that the decrease in bitcoin altcoins often react in a more abrupt and pronounced fall.
In such circumstances, the portfolio diversification for the investor, not actively trading in cryptocurrency, is devoid of any meaning, especially if he buys a coin with a market capitalization above $ 1 billion. In the first half of this year EOS has performed the only exception, but its ICO ended, core network and it is time to demonstrate results. If they are worse than expected, the EOS can very be another cryptocurrency, repeating all the movements of bitcoin.