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Correlation of Bitcoin with other cryptocurrencies

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Talking about the performance of Bitcoin is something that many experts have done, especially in 2020. However, this time we talk about what was expressed by Markos Katsanos, in the Binance blog about the correlations of Bitcoin with other cryptocurrencies and traditional assets.

What is interesting about this Binance study is how detailed it is, and especially the insights it provides for anyone interested in understanding Bitcoin’s performance recently.

Correlation of Bitcoin with other cryptocurrencies and traditional assets

Although the report is mainly from Katsanos, Binance does not necessarily completely agree with all their conclusions and warn in the same article.

On this occasion, Katsanos considers that the correlations of Bitcoin with other cryptocurrencies are now less than before. Specifically, he considers that as altcoins mature, they begin to decouple from Bitcoin.

Additionally, he estimates that because cryptocurrencies are much more volatile than conventional assets, the correlation of returns will be weaker. Another interesting piece of information that can be gleaned from this Binance study is that when designing a regression model to predict one cryptocurrency based on its correlation with another, it is best to use daily returns for short-term predictions and asset prices. for longer term predictions.

Finally, another of the most important points highlighted in the article is that the correlation with the stock market has become too remarkable. The example they put on the blog is that Bitcoin and the S&P 500 have started to show similar patterns even during intraday trading.

What other cool things can be gleaned from the Binance study?

Currently it is a good idea to have Bitcoin or other cryptocurrencies in your investment portfolio, and in this case Binance repeats it again.

According to the world’s largest exchange, the most compelling argument for owning cryptocurrencies is the unprecedented expansion of the global money supply, an expansion that has accelerated during the recent pandemic.

This comment has been supported for months, especially since the drastic increase in public debt in many countries. It has been said that this will sooner or later devalue the purchasing power of fiat currencies.

In addition, some argue that this will undermine investor confidence in the international monetary system. Consequently, cryptocurrencies like Bitcoin should be able to make their stellar appearance.

How has the Bitcoin market evolved in recent years?

According to Binance, the Bitcoin market has matured a lot since 2016. One factor that has influenced this is the growing interest and institutional participation in the market, facilitated by the availability of Bitcoin futures and options in the CME.

Additionally, something that can be mentioned within the factors for the evolution of the Bitcoin market is the variable of the cost of extracting a Bitcoin depending on the country where you are.

Therefore, Binance ensures that costs can vary enormously depending on electricity rates. According to research conducted by Elite Fixtures, the cost of mining a Bitcoin varies significantly around the world, from just $ 531 in Venezuela to $ 26,170 in South Korea.

Thus, Venezuela positioned itself as the cheapest country to extract BTC, since its electricity rates are heavily subsidized by the government. Trinidad, Tobago, Uzbekistan, Ukraine and Myanmar round out the rest of the five most economical nations. For its part, the United States ranked as the 41st cheapest country for mining with US $ 4,758.

Main cryptocurrencies included in the study and analysis of their correlation with BTC

In the cryptocurrency industry there is a fairly wide variety, as each one has different uses and objectives. However, in this Binance study the ones that have been taken into account are Ethereum (ETH), Bitcoin Cash (BCH), Litecoin (LTC), Ripple (XRP) and BNB.

The main methodology used here was Spearman’s non-parametric method. Likewise, the assumptions of Pearson’s correlation (absence of outliers, normality, linearity and homoscedasticity) were taken into account. However, if you want to know more details about it, you can check the original publication here.

Correlations in returns over several days

This time, the performance and other assets in the last 40 days were compared. Such assets include ETH, XRP, as well as the S&P 500 and gold indicator.

Correlation of the returns of various cryptocurrencies with Bitcoin over several days. Source: Binance Blog
Correlation of the returns of various cryptocurrencies with Bitcoin over several days. Source: Binance Blog

According to the information provided in the study, we will see that the correlation of the returns in the case of ETH and XRP with those of Bitcoin at the beginning was slightly higher, but after decreasing a bit it stabilized until it seemed constant. However, that of XRP declined much more than that of ETH.

This is because the price correlation between BTC and ETH (and thus the trend) was considerably stronger. On the other hand, the correlation between Bitcoin and the S&P 500 (green line) peaked for returns of 25-30 days, suggesting a stronger long-term directional trend relationship. The correlation with gold was also stronger for 10-day or longer returns.

Therefore, when designing a regression model to predict one cryptocurrency based on its correlation with another, it would be better to use daily returns for short-term predictions and longer-term prices.

Another aspect to consider in a correlation analysis is the variability of the correlations over time. Since the beginning of 2017, the correlation with equities briefly dropped, just once below zero.

conclusion

This Binance study represents a fairly complete source of information on what has been the correlation of Bitcoin with other assets. Obviously, this is only a summary of it, but stay tuned because in the next few days we will be offering more details about it.

In addition, in the blog where this report was published it was announced that more parts would come. In the next one, we can look forward to the presentation of some trading strategies for trading cryptocurrencies. Do not miss the details about it, remember that to invest, information and knowledge will always be your best allies.



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