Bitcoin was a high-gaining currency in 2016 and 2017. All the hype in December 2017 has brought even more attention to it and cryptocurrencies in general, as many people tried to jump on the bandwagon and catch a ride to the top.
But when that happened, those who had bought earlier started to sell to make some gains themselves, and Bitcoin went through another bubble/cycle where the value dropped/tanked again, as it has in the past. Some people think they got cheated, some people think it's a scam, but they don't understand how buying and selling creates bubbles in trading markets to change the value of something. Many thought they were buying into a "sure thing" that was going "to the moon" as some like to say.
And when Bitcoin was going up in USD value, so too did all the other cyrptocurrencies go up in USD value. When Bitcoin went down relative to the USD, most cryptos went down relative to the USD too.
With this recent wave of interest in Bitcoin, a study was conducted to assess how the value of Bitcoin is connected and affects other cryptocurrencies and mainstream traditional assets. The result were published in Economics Letters earlier this February, 2018.
Three cryptocurrencies were looked at: Bitcoin, Litecoin and Ripple. Gold, bonds, stocks, the S&P 500 and Forex are some of the traditional assets that were compared and correlated with Bitcoin's rise and fall in value.
The study found that Bitcoin affects Ripple and Litecoin significantly, with a spillover of 28.37% and 42.3% respectively. The highest spillover influence to a traditional asset was from Bitcoin to Forex at 15.25%. This would make sense to be the traditional asset class most affected, since Forex is about trading in currencies, which Bitcoin is. But the influence is stronger from Bitcoin to affect Forex, than the reverse of Forex affecting Bitcoin, with only a 4.18% spillover.
In terms of volatility, cryptocurrencies are more volatile than traditional assets, as many of us in dealing in cryptos already know from experience.
It seems Ripple and Litecoin have limited influence on Bitcoin, demonstrating that Bitcoin is the king of the cryptocurrency market at this time. When Bitcoin goes up in value, the other cyrptos like Ripple and Litecoin follow suit.
Cryptocurrencies are shown to be highly interconnected to each other, but are still isolated and disconnected from traditional assets. For now, this means that a devaluation of Bitcoin is unlikely to have much of a negative effect on the price of gold or the stock market, for instance.
The study concludes that cryptocurrencies are an emerging asset class for investors, but due to the demonstrated volatility they are "difficult to hedge against". That means you can easily lose a large part of your investment because of how volatile the crypto market is. Be careful how you invest in any asset, but be more careful with crypto.
Do you invest in crypto?
Do you invest in traditional assets?
Which do you prefer?
Have your say, speak your mind.
Thank you for reading. Peace.