The capitalization of the cryptocurrencies market fell to $190 billion this week. Bitcoin and almost all altcoins have fallen in price, but the cryptocurrency with the nine-year history decreased more slowly, as a result of which its market dominance increased to the next high of the year at 54 percent. Compared with the record value of $20,052, reached on December 17 last year, Bitcoin found itself at $6,000, losing about 70 percent of its price from the peak. As Tom Lee, the head of Fundstrat Global Advisors, said on August 12, his organization tracks the movement dynamics of 50 cryptocurrencies, and "they are moving in the same direction." He admitted that Fundstrat had just started "dividing the market into sectors."
What influences Bitcoin and the market of cryptocurrencies and what do they influence themselves? One study of this issue is a report published by Yukun Liu and Aleh Tsyvinski, analysts at Yale University. First, they do not finalize this issue, as "the situation in the market is changing rapidly," and secondly, the authors come to a paradoxical conclusion: "The main result of the study is that the cryptocurrencies are a class of assets that can be assessed using simple financial instruments. At the same time, cryptocurrencies are a class of assets that is radically different from traditional assets." The Yale University representatives say that "there is very little reason to believe the widespread belief that there is a correlation between the price change of cryptocurrencies and traditional assets."
Don’t Know When to Buy Bitcoin? Correlation to the Rescue
In many ways, for researchers, cryptocurrencies have remained a "thing in itself." They studied mainly three cryptocurrencies; Bitcoin, Ether, and Ripple. One of their conclusions is that if the prices of these cryptocurrencies rise by 20 percent during the week, growth continues for another seven days, which means that after the first rise, it is worth buying Bitcoin, according to which such a pattern was observed most often.
Despite the fact that, as many argue, "cryptocurrencies are not backed by anything,” the probability of depreciation of Bitcoin down to zero was estimated at 0.4 percent at Yale, 0.3 percent for Ethereum, and 0.6 percent for Ripple. This shows that cryptocurrencies have "immunity" both to the negative influence of regulation and to crises in the world of traditional finance. Tom Lee believes that the new trend with the release of tokens on the basis of various traditional assets will lead to the fact that the cryptocurrency market will behave exactly as securities on Wall Street in the future, which means that it can be concluded that it will lose the independence that it currently wields.
The representatives at Yale said that the independent cryptocurrencies market can be analyzed. According to their estimates, the increase in the number of requests to Google for the word "Bitcoin" at one percent of the average for two weeks leads to a 2.3 percent rise in Bitcoin prices in the next two months.
When analyzing reports on Twitter, researchers from Yale came to the conclusion that the growth of the number of tweets having the word "Bitcoin" at one percent of the average value during a week is associated with an increase in the price of this cryptocurrency by 2.5 percent next week. Analysts Linus Roxbergh and Simon Shadman confirm this, as according to their calculations, the correlation between positive tweets about Bitcoin and the market of cryptocurrencies is 80 percent.
And to what extent do the messages in the media affect the dynamics of the cryptocurrency market? For example, the news that the owner of the New York Stock Exchange, ICE, intends to open the Bakkt crypto exchange platform could not support the market, said analyst Meltem Demirors. In her opinion, it is necessary to search for "metrics,” by influencing which, it would be possible to cause a rise in the prices of cryptocurrencies.
A study conducted by experts at the University of Goteborg, Jenny Asplund and Felicia Ivarsson, concludes that the intensity of using the topic of cryptocurrency in the media often has a negative character, is exacerbated during the period of the cryptocurrency market decline, and this is how the corresponding correlation arises. More precise was the definition of the following relationship, however, as the more positive information on this topic in the media, the higher the dynamics of the market, and vice versa.
Analysts at Yale University found that cryptocurrencies are immune to the dynamics of key currency exchange rates, in particular, the U.S. dollar. When the U.S. currency rises, it does not necessarily lead to a reduction in the price of crypto assets, although this relationship can be traced in most other classes of assets. For example, this is how the price of a troy ounce of gold behaves, as it is expressed in U.S. dollars, and this year it is at the minimum levels, while the U.S. currency strengthens against most of the world's monetary units.
Cryptocurrencies Affect the Most Important Factor for Institutional Investors: The Wall Street Index
At the same time, Bitcoin itself influences the dynamics of key exchange indices in Japan (Nikkei 225), South Korea (KOSPI) and the U.S. (S&P 500), starting at least since 2017. The researchers of the Jönköping University came to this conclusion. These countries are in the top three for turnover of cryptocurrencies, so we can say that the dynamics of the Bitcoin price in these countries began to play the same role as the change, for example, of oil prices, with the biggest impact being seen in the U.S. Great interest in cryptocurrencies has led to the following observation. Companies that use "blockchain" in their names, the basic technology of the cryptos, have better dynamics of their shares in 58 percent of cases after announcing the renaming of their business, and this effect lasts for the first five days, and also persists for at least another 90 days.
Thus, we see that the cryptocurrencies and the underlying technology behind them cannot only be influenced by factors from outside, but they themselves become factors that affect other assets, in particular, stocks and stock indices. This really means a lot. Perhaps the nervousness of Wall Street, which manifests itself in the desire of some of its players to enter the cryptocurrency market, while at the same time criticizing it, could precisely be the manifestation of the fear of competition that the cryptocurrencies bear?
Finding Correlations Where They Do Not Exist
At the same time, the dynamics of the cryptocurrency market itself remain largely unpredictable, says Samson Mow, the chief strategist at Blockstream Corp. and blockchain developer. For example, there is an attempt to link market movements with a decision of the U.S. Securities and Exchange Commission (SEC). This is clearly an analysis after the fact, though, and secondly, it is a question of rather rare events, so that a reliable correlation can be built on them. You cannot explain any movement of the market (for example, its decline, as we are seeing now) with what happened before (for example, the SEC's refusal to approve the Gemini Trust Company’s application for the launch of ETF for Bitcoins) such a logical error was written by the Nobel Laureate in Economics Daniel Kahneman in the book "Thinking, Fast and Slow." He warned that one cannot automatically attribute the cause of a subsequent event in the markets to what came before, even if this series of events is observed quite regularly.
Bitcoin perfectly confirms this thesis, as it is enough to remember how some analysts were mistaken when they assumed that the holding of the next Consensus New York Conference on May 14 would cause a rise in the price of the cryptocurrency, as it had happened before from 2015 to 2017, when such a correlation was observed, as spoken of by Tom Lee. This correlation did not have the same effect this year.
"Simple Financial Instruments" Applied to Cryptocurrencies Can Fade into the Past
There is a feeling that the attempts to establish a Bitcoin correlation with some events and facts are on the wrong track. First, Nassim Taleb with his book "The Black Swan" and further in his subsequent works have clearly shown that those "simple financial instruments" of market analysis that the experts at Yale apply are imperfect and cannot yield correct answers so often. Secondly, in the era of a fundamental change in the financial world, and the cryptocurrencies themselves in terms of the degree of influence, are compared with the Internet and the invention of electricity and the steam engine. As IMF strategist Martin Mühleisen writes, it is hardly advisable to consider that "after integration" of cryptocurrencies into the traditional financial market, they will behave like "ordinary" securities.
Integration would be possible if there would be confidence that exchanges and banks will remain in the fundamental form in which we have known them for centuries. It is obvious that cryptocurrencies are not just another class of assets "for the collection" of the New York Stock Exchange, but that they are capable of replacing Wall Street with their technologies. Cryptocurrencies are a way of treating a traditional financial system that makes all other medicines unnecessary. Finally, and thirdly, because Bitcoin does not depend on many other assets, its similarity with gold is evident, so it was already being called the "new digital gold." Even gold is less "independent,” as its price fluctuates along with the growth or decrease of the dollar index, which measures the value of the American currency to the basket of key monetary units of the world, unlike Bitcoin.
Indeed, analyst Ryan Selkis is right, as he explains why the market did not grow after the news about Bakkt, since ICE only creates an additional channel of offers for cryptocurrencies. But one cannot disagree with the fact that we need the "demand shock" that Selkis speaks about. The value of technologies and the changes that cryptocurrencies bring to the world are hardly worth appraising through the market capitalization of cryptocurrencies and Bitcoin in particular. It is like determining the "price" of the discovery of electricity by the cost of all the bulbs produced.