Study proves: High correlation between crypto assets and traditional market

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A study by Iconic Funds now suggests that Bitcoin and Ethereum in particular have a high correlation with the traditional market. The reason is the high liquidity, according to the crypto company.

As BTC echo last September 29 reported , the youngest Bitcoin increase hand went after the sharp fall on Monday again in hand with the stock indexes rebounded also to short-term distortions. Bitcoin investors speculate about the reasons for this high correlation. After all, virtual gold is often said to be decoupled from traditional market movements. After the Covid 19 crash in March, prices in both worlds moved almost in lockstep. A study by the crypto asset management company Iconic Funds now suggests that cryptocurrencies also generally have a strong correlation with traditional markets . Liquidity plays a crucial role in this.

COVID-19, the downturn driver

The start-up based in Frankfurt is a joint venture between the crypto asset management group Iconic Holding and Immediate Edge. It was founded by entrepreneurs Christian Angermayer and Mike Novogratz. The latter is best known in the crypto space as CEO of the crypto investment firm Galaxy Digital Investment Partners.

Background of the study, which was published in mid-September, were the rapid COVID-19-driven price losses that tore down not only the traditional markets, but also Bitcoin and Co. in March.

How could this happen? The crypto start-up wanted to know exactly this and created a data set for the period from January 1, 2009 to March 31, 2020 — and thus covers practically the entire crypto history from the Genesis block to the Corona crash. The team focused on the ten largest cryptocurrencies, measured by market capitalization.

Not just the exception, but the rule

While for many the obvious explanation for the strong correlation in March was that people have the same pattern of action in times of crisis and first sell off their speculative investments (stocks, crypto currencies) in order to get cash, Iconic Funds goes one more thing with its empirical study Step further: cryptocurrencies correlate not only with the markets in the event of liquidity bottlenecks, but also with most market movements. The start-up assumes that the coupling of Bitcoin and Co. is not an exception, but rather the rule.

Cryptocurrencies are coherent with each other

First, the study examined the coupling of the cryptocurrencies with one another. Apart from the two exceptions Tether and LEO, the final results show that the degree of correlation between the individual cryptocurrencies — with very few exceptions -is very high. On the one hand, this means that the leading cryptocurrencies can be viewed as a coherent unit. Unless their structure and price drivers differ significantly, as is the case with stable coins such as Tether. LEO also seems to have a relatively low correlation to other cryptocurrencies. The authors of the study cite a possible reason for the fact that LEO, as the in-house token of the Bitcoin exchange Bitfinex, does not pursue the goal of developing into a means of payment. In addition, the sale was initially carried out exclusively privately, which limits public engagement and liquidity.

Correlation with traditional market indices

The starting point was the Pearson correlation, which was used to measure the prices of the crypto currencies with the market indices over the entire available period. The results show that there is indeed a limited correlation between some cryptocurrencies and financial markets. Surprisingly, Bitcoin, Ethereum and Chainlink are the only coins that provide a statistically significant correlation with the major indices. Misleading result? No. According to the empirical study, it is due to the liquidity.

The reason for correlation is liquidity

From the moment cryptocurrencies see the light of day, their liquidity is usually very low. This was also true of Bitcoin’s early years. Very few people trade in such a currency in these early stages. By definition, the correlations with other market indices can be expected to be close to zero as there are not enough market participants to influence the proper price discovery. Rather than being influenced by systemic market events, prices are more likely to be driven by random and often illogical behavior. Conversely, high liquidity means that crypto currencies correlate with traditional markets.

Study proves: High correlation between crypto assets and traditional market was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

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