After the Biggest Cryptocurrency Hack Ever, Bitcoin, Ethereum, and Ripple Are All Up — Why?

You Don’t Need a Diversified Crypto Portfolio to Spread Risk: Here’s Why

After the Biggest Cryptocurrency Hack Ever, Bitcoin, Ethereum, and Ripple Are All Up -- Why?

Sep 26, 2018·8 min read

Apart from a few outlier situations, the top cryptocurrencies are very closely correlated with Bitcoin; as a result, the idea of diversifying a portfolio to spread risk is really only a myth in my opinion. This article examines the correlation between cryptocurrency prices to explain my reasoning.

There’s a lot of misinformation, rumors, and just plain incorrect information out there about cryptocurrency.

In fact, I think one of the most misleading labels in the cryptocurrency market is this idea of Bitcoin dominance, which is represented as Bitcoin’s percentage ownership of the entire market cap of cryptocurrency.

You can find it on legitimate websites CoinMarketCap, and while it’s a fair idea, I think the label it’s given creates a misconception about how the cryptocurrency market works. Simply put, Bitcoin Dominance is calculated as:

On September 23, 2018, CoinMarketCap reported Bitcoin’s dominance to be 51.3% because it has a total market cap of $115.7 billion, while the Total Market Cap is $225.5 billion. 115.7/225.5 = 0.513, or 51.3%.

But that number couldn’t be further from the truth. Bitcoin’s actual dominance extends much deeper into the entire market — any cryptocurrency trader can confirm this from watching Bitcoin historically make or break their entire portfolio.

Really strong positive correlation between Bitcoin and three major cryptocurrencies; Data Source: www.coingecko.com

I ran some correlation comparisons to see exactly how much of a hold BTC commands. Litecoin, Ethereum, and Ripple all showed signs of extremely strong correlation with Bitcoin prices between 2016 and 2018.

Normally when comparing the correlation between two items, any number between 0.7 to 1.

0 indicates a strong positive correlation; in other words, between those two numbers, it’s a really strong lihood that you have a powerful relationship between the two.

With a positive, powerful relationship (which we call positive correlation), when the number of one item goes up, the other one goes up, and vice versa.

That being said, Bitcoin’s price correlation was 0.954 for Litecoin, 0.916 for Ethereum, and 0.836 for Ripple between 2016 and 2018.

Litecoin and Ethereum are both trade-able cryptocurrencies on Coinbase, which is arguably the largest fiat-to-crypto direct exchange in existence right now, which can account for the strong correlation with Bitcoin prices — everyone cashes in and cashes out at the same time.

Data Source: www.coingecko.com

Ripple is an interesting representative case for altcoins that exist outside of the realm of direct fiat-to-crypto exchanging, as it can only be found on exchanges that have not historically accepted fiat. This means that users have to go through an extra step of moving Bitcoin from a place Coinbase into an exchange Binance.

From a purely psychological perspective, that extra step may indicate a much stronger desire to actually purchase Ripple than the other two.

For example, on Coinbase, you might think, “Sure, I’ll put some into Ethereum and Litecoin too, why not?” but because Ripple isn’t on Coinbase, you wouldn’t buy any of it — unless you actually wanted to.

Then you’d have to learn how to move your funds Coinbase into an exchange that trades Ripple.

Even with an arguably more adamant and determined investor pool, though, Ripple’s correlation with Bitcoin prices between 2016 to 2018 still came out to 0.836.

Skeptics might argue that Bitcoin’s influence over the price of other coins was much stronger before than it is today, but by going back to 2016 I’m unfairly weighing irrelevant historical data to spread fear, uncertainty, and doubt (FUD — a favorite acronym of the crypto trolls) about altcoins.

But first of all, I’m not here to shit on altcoins. I hold many myself, and I have Ripple. I’m only here to ground you in reality — sure, coins may “moon” at some point, but apart from those outlier incidents, their prices will be directly influenced by Bitcoin.

Second, and more importantly, Bitcoin’s influence over the price of other coins has become stronger today than it was years ago. In the chart below, I’ve created a correlation matrix between some of the top coins in the market today: Bitcoin, Ethereum, Ripple, Stellar, Litecoin, Monero, and Dash.

In 2016, the correlation of prices between each currency was very loose. In fact, if I recall correctly, you couldn’t even purchase Ripple except through this sketchy website called Gatehub. And I think you had to use fiat to purchase, but because that would be a problem for US citizens, I don’t think my account was ever verified.

The details are a bit hazy and a bit of a tangent, but the point is, in 2016, altcoin prices were pretty loosely correlated Bitcoin. Only Litecoin, Monero, and Dash really showed any moderate correlation with Bitcoin. By stock-price standards, one might argue that it is still pretty strongly correlated, but when comparing with the latter years, 0.6–0.

7 looks pretty decent.

The Bull Run

2017, which marks the start of the most recent cryptocurrency bull run, pretty much turned every altcoin into a planet with Bitcoin as the giant star in the center. Notice that correlation shot up dramatically, with only Ripple showing some resistance to Bitcoin pricing.

Data Source: www.coingecko.com

Near the end of 2017, Ripple reacted quite dramatically to Bitcoin’s price pump by providing a pump of its own. Ripple, which has an enterprise entity that is establishing strong partnerships with many financial institutions globally, showed some of the strongest resistance to Bitcoin price changes in that year.

Its competitor, Stellar (ironically founded by former founder and CTO of Ripple), also demonstrated resistance — the correlation between those two coins was 0.9, which seems to indicate a universal sentiment across both currencies — e.g., when investors were confident in Ripple, investors were ly to be confident in Stellar as well.

The Market Crash

In 2018, price trends shifted gears as positive market sentiment around cryptocurrency dwindled. Bitcoin prices fell from $17,000 to around $6,600 today, and the impact of this crash could be felt across the entire cryptocurrency market. During this time, correlation between cryptocurrency prices were even strong with the weight of Bitcoin’s price drops pulling everything down with it.

During 2018 (from January to September), correlation to Bitcoin prices never fell under 0.85.

Interestingly enough, Litecoin and Ethereum, which demonstrated much stronger correlation with Bitcoin prices during the 2017 bull run, showed the weakest correlations with BTC throughout the crash.

Whether or not it also has to do with the fact that they’re both available through Coinbase, or if you believe it’s other reasoning, feel free to elaborate in the comments section of this article.

Outliers

In the 2018 crash, though, while most of the major cryptocurrenies (i.e., the Top 15) demonstrated a very strong correlation with Bitcoin prices (>0.70), EOS showed really strong resistance to the trend.

In 2017, when EOS was first introduced, it demonstrated a much more positive correlation with Bitcoin prices. Its year-long ICO, which started in June 2017 and ended in June 2018, culminated with the launch of its main net. Despite its controversial nature as a cryptocurrency, it is inarguable that the coin has garnered a strong following with over $4 billion generated in its ICO.

In 2018, EOS has been one of the few coins that has managed to remain above its January price. If I had to attribute this pattern to a reason, my wild guess would be that it is at least partly due to a combination of a few Bitcoin bull runs and the year-long nature of the EOS ICO.

With each bull market for Bitcoin in 2017, there was a larger bull market available for EOS as it rolled closer. In April 2018, a major spike occurred yet again, which was uncorrelated with Bitcoin prices, as the ICO date comes closer to meet the end and the EOS main net prepares for launch.

While critics may argue a cult-of-personality, where prices can be attributed to public approval of its leader (Dan Larimer), the cult-of-personality case would be extremely hard to argue considering other cryptocurrencies, Ethereum and Bitcoin Cash, have leading personalities (Vitalik Buterin and Roger Ver, respectively). And if you examine the Ethereum and Bitcoin Cash correlation, you’d notice that both demonstrate strong correlation with Bitcoin prices. So if you do believe in the cult-of-personality argument, then you would also have to believe that for some reason or another Dan Larimer has a strong cult following than the others.

So What Does This All Mean?

Data is interesting, but as many people warn, it is really only an indicator of past patterns. Especially in this volatile market, there is no guarantee that these correlation patterns will hold a year, a month, or even a day from now.

Some interesting points, though, are that the idea of a diversified cryptocurrency portfolio to spread risk is, in my opinion, a myth.

You can certainly diversify for reasons such as interest and trying to potentially maximize the upside, but as the correlation patterns have shown, there isn’t really any less risk in holding other coins, especially since Bitcoin drags it all down.

While I haven’t quantified a value for this statement, from eyeballing and personal experience I’ve observed that, often, price drops on Bitcoin actually results in harder drops in altcoins.

With such a strong correlation to Bitcoin prices, anyone not actively investing or day trading cryptocurrencies could have a fairly decent return in relation to a diversified portfolio — especially one diversified in the $1B+ market cap coins. While we have seen an outlier with EOS, because the main net is out now and the blockchain has to deliver on its promise, if the hype doesn’t align with realities, it could become just another Bitcoin-pegged cryptocurrency very quickly.

Where Did I Get My Data?

No, I didn’t pay CoinMarketCap to access all this pricing data. I collected from 2016 to 2018 and I used the CoinGecko API, which is free and contains just as much quality data — way more than I needed to do this analysis.

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Источник: https://towardsdatascience.com/bitcoin-dominance-5a95f0f3319e

Cryptocurrencies and ICOs

After the Biggest Cryptocurrency Hack Ever, Bitcoin, Ethereum, and Ripple Are All Up -- Why?

Cryptocurrencies and initial coin offerings (ICOs) have emerged over the last 10 years as investments. You could lose a lot of money if you invest without doing your research first.

How cryptocurrencies work

Cryptocurrencies, also known as virtual currencies or digital currencies, are a form of electronic money. They do not physically exist as coins or notes. A cryptocurrency unit, such as a bitcoin or ether, is a digital token. These digital tokens are created from code using an encrypted string of data blocks, known as a blockchain.

The Reserve Bank of Australia's website explains how cryptocurrency and blockchain technology works.

Cryptocurrencies are used as payment systems to execute contracts and run programs. Anyone can create a digital currency, so at any given time there can be thousands of cryptocurrencies in circulation.

Types of cryptocurrencies

Each cryptocurrency has different capabilities. Most were not created to be investments.

Bitcoin

Bitcoin is a digital currency. Users in the Bitcoin network (bitcoin miners) use computer-intensive software to validate transactions that pass through the network. They earn new bitcoins in the process. Bitcoin is a decentralised global payment system, but it's bought and sold in large volumes as a speculative investment.

Ethereum

Ethereum uses blockchain technology to run an open source platform. It can process transactions, contracts and run other programs.

This allows developers to create and run any program, in any programming language, on a single decentralised platform.

In the Ethereum blockchain, miners work to earn 'ether', which is a crypto token. Ether can pay for fees and services within the network.

Litecoin

Litecoin is an electronic payment system. Litecoin transactions process faster than Bitcoin. There are also more Litecoins in circulation than there are Bitcoins. Some users see Litecoin as a 'lighter' version of, or backup for, Bitcoin.

Ripple

Ripple is a transaction protocol designed to complement Bitcoin. It allows real-time transfers between users in any currency, including other cryptocurrencies.

Ripple is a database in which users can store and transfer value in any currency on a protected network. Ripple uses tokens developers create, rather than mined or earned other digital currencies.

Some users don't see Ripple as a true cryptocurrency, but the technology has been popular with financial institutions.

Stablecoin

Stablecoin is a marketing term for a crypto-asset that is 'supposedly' less volatile than standard cryptocurrency. Stablecoin tries to stabilise its market value by:

  • attaching it to an external asset, such as government-issued currency
  • maintaining a reserve of the backing asset
  • using algorithms to control the supply of available tokens

Using cryptocurrencies

You can buy or sell cryptocurrencies on an exchange platform using traditional money. The cryptocurrencies are kept in a digital wallet and some stores accept cryptocurrencies are payment for goods and services. But, they are not legal tender and not widely accepted.

You can withdraw some popular digital currencies Bitcoin as cash through special ATMs. Cryptocurrency networks generally have no or low transaction fees.

How initial coin offerings (ICOs) work

An ICO is a way a project can raise money over the internet. You invest in an ICO by sending money or cryptocurrency to a blockchain project. In return you receive digital tokens related to that project.

ICOs are speculative, high-risk investments. Many ICOs are for projects that:

  • are experimental
  • are at a very early stage of development
  • may not have even started yet

Some projects may take years before they become commercially viable, if at all. A large number of ICOs fail or do not increase in value.

ICOs sound similar to initial public offerings (IPOs). But ICOs usually don't offer any legal rights and protections. Investing in an IPO means you are investing in an established company or asset, rather than a project.

While ICOs use the internet to raise money they are not the same as crowd-sourced funding. Crowd-sourced funding offers basic investor protections under Australian law.

ICO white papers

There will usually be a 'white paper' that contains information about the ICO and the project it's funding. The white paper should provide:

  • the names and contact details of the people behind the scheme
  • information on what they are planning to do with your money

The information in the white paper isn't always accurate. Sometimes the information can be unbalanced or misleading. The white paper may overestimate how profitable the project will be to convince you to invest.

If the white paper claims the ICO is not a financial product, they may be trying to avoid regulation. If the promoter avoids regulation, you may have no consumer protection.

The white papers can be very technical. This can make it difficult to understand what your rights and obligations will be after you've bought the ICO tokens.

The risks of investing in cryptocurrencies and ICOs

You could lose a lot of money if you buy into an ICO or cryptocurrency without doing your research first.

Fewer safeguards

The platforms where you buy and sell cryptocurrencies and ICOs are not regulated. You're not protected if the platform fails or is hacked.

ICOs are highly speculative investments and many have turned out to be scams. It's even harder to get your money back if it turns out to be a scam and the ICO is from an overseas entity.

Cryptocurrency failures in the past have lost investors significant amounts of real money. In most countries cryptocurrencies are not recognised as legal tender. You're only protected to the extent that they fit within existing laws, such as tax laws.

Values fluctuate

Investing in virtual currencies and ICOs is highly speculative. Values can fluctuate significantly over short periods of time.

The value of cryptocurrencies and ICOs depends on:

  • its popularity at a given time (which can depend on factors the number of people using it)
  • how easy it is to trade or use it
  • the perceived value of the currency
  • its underlying blockchain technology

Scammers can use social media and messaging apps to push up the price of ICO tokens. They sell the tokens to other buyers at falsely inflated prices. This is known as a 'pump and dump' scheme.

Your money could be stolen

A computer hacker can steal the contents of your digital wallet.

Your digital wallet has a public key and a private key, a password or a PIN. However, digital currency systems allow users to remain relatively anonymous and there is no central data bank. If hackers steal your digital currency or ICO tokens, you have little hope of getting it back.

You also have no protection against unauthorised or incorrect debits from your digital wallet.

Cryptocurrency scams

Scammers trick people into investing in fake opportunities to buy cryptocurrency. Watch out for these tactics:

  • false promises of very high returns
  • fake support from celebrities or government agencies
  • people who contact you through social media
  • using dating apps to establish a romantic connection and gain trust
  • multiple or constantly changing bank accounts used for transfers

ICO scams

It can be difficult for regulators to make sure proper investor protections are in place because ICOs are:

  • sold internationally
  • available online
  • usually paid for with cryptocurrencies

It's often unclear where the entity's incorporated and what laws and regulations apply to it. See ASIC's media release on misleading ICO statements.

Some issuers disappear as soon as they've finished fundraising, which may indicate that it is actually a scam. When this happens, investors have very little or no chance of getting their money back.

Rhett is scammed $97,000 by a fake endorsement

Rhett saw an article on a news website about ‘The biggest deal in Shark Tank history, that can make YOU rich in just 7 days! (Seriously)’

The news article was really an advertisement. It took Rhett to a website that included endorsements from Shark Tank judges for Bitcoin trading software. The endorsements were fake.

Rhett was interested in trading Bitcoin, so he provided his contact details. Soon, an Account Manager named Max began calling Rhett. Max called often, pressuring Rhett to open a trading account and make a deposit. By depositing between $40,000 and $50,000 upfront, Max promised Rhett he could earn at least $15,000 per month.

Max promised Rhett that the money he deposited would be safe because he would have total control of the account. “It’s more or less moving your money in your left pocket from your right pocket,” Max said. Max promised Rhett that he could withdraw his money whenever he wanted to.

Max eventually convinced Rhett to open an account and deposit $40,000. Rhett started trading Bitcoin, but things didn’t go to plan. Rhett started losing money. Max encouraged Rhett to deposit more money so they could fix the situation. Max promised that in a week Rhett able to withdraw the money that he needed.

Rhett deposited more money in the hope he could recoup his losses. Rhett ended up depositing and losing a total of $97,000.

Источник: https://moneysmart.gov.au/investment-warnings/cryptocurrencies-and-icos

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