Yahoo Finance As Bitcoin Goes, So Do Other Cryptocurrencies
Volatility in trading bitcoin and other digital coins continues as the cryptocurrency market ramps again, surging past the $6,000 level for the most widely purchased virtual currency.
Bitcoin remains highly correlated with the other digital coins, known aptly as the altcoins. When bitcoin rises, these altcoins, such as ethereum, ripple, bitcoin cash, litecoin and monero, move in tandem. Bitcoin has a positive correlation with the other coins, ranging from 0.74 to 0.95, nearly reaching a score of 1 that would give it a perfect correlation, says Mati Greenspan, a senior market analyst at eToro, a Tel Aviv-based social investment network.
"The correlations between crypto to crypto are extremely positive," he says. "This is due to the highly speculative nature of this high-risk market."
[See: 7 of the Best Cryptocurrencies to Buy.]
Since December, bitcoin, which is lightly regulated, has given investors a show, hitting a high of $20,000 before dipping to $8,500 by mid-March and ultimately reaching lows in the $6,000 range, wiping out billions of dollars in market cap because of extreme volatility, hacking and orders from regulators. Large losses are not unusual for bitcoin and other digital currencies.
While the losses in ethereum, the second-largest digital currency, are sometimes are larger than bitcoin and the dips in ripple are fewer compared to bitcoin, those were only coincidences as the reverse has occurred, says Greenspan.
"This may have been the dynamic over the short term but is not a rule of any kind," he says.
Ethereum, currently the most widely used blockchain in the world by transaction rate, has tested the $200 per coin level as some traders appear to have "gotten nervous" over its price as concerns on how to grow the network rose with some investors, Greenspan says. In the past 12 months, prices in ethereum have swung widely from nearly $1,500 to below $200.
"We're still in the early stages of decentralized computing and the future is far from certain," he says. "Recently there's been a sign that the path to scalability is once again moving forward."
Since the beginning of 2018, the price of bitcoin dipped by 70 percent, while ripple lost more than 90 percent, says Marc O'Brien, CEO at Crypterium, a London-based cryptocurrency banking and payments platform.
"Many crypto holders consider ripple a centralized company fully controlled by its issuers, which is not at all what the whole crypto decentralization story was about," he says.
Bitcoin has a relationship with the U.S. dollar. Bitcoin has shared many levels of correlation with different assets, including the stock market and the U.S. dollar. In 2017, it was highly correlated with the stock market since both were viewed by investors as "viable places to store excess capital left over from the central bank expansion," Greenspan says.
The dynamic shifted this year as some stocks have become volatile and in turn, bitcoin gave back a large amount of its gains, he says.
The correlation with the U.S. dollar has always been negative and similar to most commodities, bitcoin trades against the dollar.
"It tends to get stronger on dollar weakness and vice versa," Greenspan says. "This has played rather distinctly over the last month. This kind of behavior is typical of commodities. As the buck falls, it takes more dollars to buy a barrel of oil or an ounce of gold and vice versa."
[See: The 10 Biggest Digital Currencies by Market Cap.]
One belief is that as the U.S. dollar dominates the markets, investors turn to it instead of bitcoin, he says.
The relationship between bitcoin and the altcoins is similar to an object being on a pulley, says Jason Spatafora, co-founder of Marijuanastocks.com and a Miami-based trader and investor.
"Bitcoin is the wind, litecoin is the sail and ethereum is the boat," he says.
The trading of these virtual coins is highly manipulated, says Spatafora, who has traded bitcoin, litecoin and ethereum to determine whether any of the coins were undervalued, but instead found irrational exuberance in the market.
"I can't think of anything more manipulated," he says, laying blame on the widely attended bitcoin conferences.
The price of bitcoin reached $18,000 last December, but tanked on the day the conference started.
"Every time there is a giant bitcoin conference, the result is that bitcoin tanks because they are manipulating the price," Spatafora says. "If it happened once, it's a coincidence, but when it occurs five times, it signals what is going on. They are creating some volume like penny stocks so they can create more hype."
How to invest in cryptocurrency. Diversifying among bitcoin and the other virtual currencies is one strategy to lower risk and large dips and highs, resulting in more stable returns.
"Cryptocurrencies are a new asset class and a new technology," says Greenspan. "As such they carry a particularly high level of risk and they should be approached with extreme caution and probably shouldn't make up a large portion of your overall portfolio. A recent study showed that the optimal allocation of cryptos in a given portfolio should probably be around 7 percent and I fully support this view."
Investing in more than one type of cryptocurrency is important because many of the coins and tokens tend to outperform bitcoin because of market growth, says O'Brien.
"Bitcoin still has significant upside potential while bearing minimum risk out of all the cryptocurrencies," he says. "For conservative investors, the balanced portfolio of 60 percent of bitcoin and 40 percent of the other altcoins would be a perfect option."
[See: 7 Blockchain Stocks That Are Ahead of the Curve.]
While there are new coins emerging in the market often, bitcoin tends to fare the best, says John Lore, managing partner of Capital Fund Law, a New York-based law firm that works with cryptocurrency clients.
"From a store of value perspective, bitcoin has proven to be more stable in the long run than the altcoins and seems to be the most favored by institutional investors as a store of value."
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