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Binance, one of the largest cryptocurrency exchanges in the world, recently published a report on the correlation between altcoins, Bitcoin (BTC), the U.S. dollar, and more. These results cover not only 2019, but the previous year in cryptocurrency.
Of course, there are obvious marks of correlation between Satoshi’s currency and those that followed. But, this report notes that these connections are fading. These assets may soon stand apart from one another.
To start, the study notes that while the top 30 cryptocurrencies regarding market cap were “highly correlated” over the last three months, Bitcoin had the strongest correspondence with them all. Unsurprisingly, this makes the first digital currency the leader of the pack.
However, “the correlation of crypto asset returns based on BTC prices (i.e., Bitcoin-adjusted returns), highlights significantly lower correlations among cryptoassets relative to correlations among the same coins in USD returns,” continues the report. Essentially, altcoins are starting to form their own trends rather than react directly to Bitcoin’s price.
Conversely, the correlation between altcoins and USD has actually increased. This is partly due to the amount of dollar-backed stablecoins that have come out in the past year. No longer must investors buy Bitcoin to trade into other assets. This market trend will continue as more USD-based trading pairs come to fruition.
Some third-party factors affect correlations as well. One listed factor is the “Binance Effect”. This term refers to the fact that cryptocurrencies listed on Binance “oftentimes have higher correlations among themselves”. This is thanks to Binance being one of the most-used exchanges out there.
The other factor is consensus mechanisms:
“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.)”
Keep in mind that digital assets have only been around for ten years, with a majority of these currencies popping up over the past few years alone. It will take time for the market to mature and stabilize. That said, we can be certain that more currencies will begin to grow independent from Bitcoin. From there, we will see a truly successful market full of assets that can exist of their own accord.