What Can We Learn From Cryptocurrency Correlations
Bart Michalczuk | Jan 31, 2018 01:26PM ET
As the first month of 2018 comes to an end, most large-cap cryptocurrencies continue to struggle after posting impressive gains in 2017. As of Jan 30th, Bitcoin is down -27.9% for the year, Litecoin is down -27.7%, Ripple is down -43.6%, Monero is down-17.0%, and Dash is down -32.4%. Ether is one of the few coins holding on to YTD gains, and is up 42.2% (Figure 1).
This month’s price performance isn’t entirely surprising, given January’s tendency for price depreciation (Figure 2). Yet, price declines have also been driven by a real, relentless cycle of negative news that started late last year with South Korea’s Financial Services Commission’s December 11th announcement of a cryptocurrency trading clampdown (Figure 3), followed by:
(1) China’s early 2018 move to slowly shut down bitcoin miners
(2) news of Indian banks suspending crypto exchange accounts
(3) France/Germany’s intention to propose cryptocurrency regulation at the next G20 meeting
(4) Coincheck’s $523 million NEM hack, and
(5) controversy surrounding the Tether altcoin (which in fact has been a concern for much of 2017 and only recently has gained mainstream attention).
Offsetting this slew of bad press have been, among others, announcements of:
(1) Robinhood’s recent decision to provide fee-free cryptocurrency trading to its customers
(2) a large Japanese electronics chain’s (Yamada Denki) intention to accept cryptocurrency payments, and
(3) the Lightening Network’s early success on the Bitcoin network.
The few bullish cryptocurrency news pieces that we’ve seen this year have so far failed to discourage the bears. And, as the cryptocurrency selloff has accelerated, correlations among the large market-cap coins have reached historical highs, demonstrating the “macro” nature of this recent cryptocurrency selloff. On December 15th, for example, the Bitcoin-Litecoin, BCH/DASH, Bitcoin-Monero, and Bitcoin-Ether 20-day rolling correlations were only, respectively, 0.02, -0.23, 0.11, and 0.02. As of yesterday, however, these correlations had reached new peaks of 0.88, 0.89, 0.85, and 0.9. Indeed, rising cryptocurrency correlations are a very common feature of bearish crypto markets (Figure 4).
It is extraordinarily difficult to forecast the potential news that may help reverse what has become prevalent bearish momentum. Continued growth of the Lightning Network, growing adoption in the cryptocurrency payments arena, and further clarity on South Korea’s crypto regulatory plans are only a few of potential factors that may help the cryptocurrency markets turn the corner. Regardless, whatever the reasons for an impending turnaround may be, watch for declining crypto cross-correlations as a potential indicator which signals that the worst may be behind us!
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