(Disclaimer: All opinions expressed in this article belong exclusively to the writer)
BTC hit headlines after a sudden jump from more than $ 34,000 to more than $ 40,000 yesterday, standing at about $ 37,500, up 18% from a week ago.
This, in itself, is nothing new or extraordinary, of course. In fact, what I’m writing here won’t be surprising to many, but as a crypto-skeptical resident, prudent, I don’t think it’s something that gets much publicity either, especially in today’s environment.
While we currently have more tools, applications, portfolios, more sophisticated exchanges, and even more cryptocurrencies than a few years ago, the simple reality is that the entire market is maturing quite slowly.
In many ways, this is how it was during the 2017/18 rally. Technological sophistication is not followed by functional sophistication, at least so far not on a large enough scale.
And there is a simple metric to show it: the correlation between currencies.
If you’re an enthusiastic observer, you’d probably have noticed that almost all cryptocurrencies tend to move in tandem. When BTC rises, so do all other currencies. The same thing happens when value is lost.
Yesterday’s jump was no different and produced similar results, as can be seen below:
Almost all currencies experienced a rapid rise in the price in US dollars and then suffered a fall, standing above the previous rates.
This phenomenon is not new and has been observed for almost as long as cryptocurrencies have existed, although it tends to be more pronounced during high-interest stock markets, which involve more people than tech nerds.
It has spawned many conspiracy theories that cryptocurrencies or major hedge funds are secretly collaborating to bomb and dump currencies as they please, for profit at the expense of smaller traders, especially because cryptocurrencies are largely non-existent. regulated and highly anonymous.
The answer may be quite a bit simpler.
The reality is that it shows the degree of youth and roughness of the whole market. This, despite all the seemingly extensive differences in characteristics, technology or even the supply of coins play a minor role, and they are all treated largely as an asset class rather than independent and competing tokens with very characteristic different.
In today’s reality, few people seem to make investment decisions based on the technological superiority of one currency over another and demand is not yet driven by any real use (as few really need crypto to buy anything).
There are also people and companies that allocate money to currency baskets, which further strengthens the correlation between them.
And it’s also visible with smaller currencies, which most people wouldn’t even know about, probably pointing to speculation determined by the movements of dominant currencies like BTC or ETH.
What you see below is a graph showing the strength of correlation between several cryptocurrencies for 30 days versus one year (the second image). The correlation is measured on a scale of -1.0 to 1.0, which means that:
- When two coins have a 1.0 correlation, they move in the same direction 100% of the time
- At -1.0, they move in the opposite direction 100% of the time
- 0.0 indicates that they are independent of each other
As you can see, over the last month (it’s similar for a day and seven days), the strongest positive correlation is seen with Bitcoin: most 70% to 80% of the time, other currencies will follow the leader.
But what’s more interesting is that almost all cryptocurrencies move in tandem more than 50% of the time, even in most exotic pairs.
However, when we look at the whole year, taking into account the period before the current increase that began towards the end of 2020, the relations between the different currencies are demonstrably weaker.
It suggests that the current bullish market is largely driven by speculation, with no appreciable understanding of the differences between various currencies (contrary to the previous aspect of trading). Any cryptocurrency becomes a purchase as long as it follows the trends set by BTC and / or ETH.
Markets are offered with dumb money looking for quick returns, largely ignoring the technological side of what cryptocurrencies in particular offer.
Not surprisingly, this has also spurred the creation of many new derivative tokens, which have often increased in value, even if there is no useful case for their existence.
Crypto will mature with the decline of Bitcoin
We can only talk about the maturity of cryptocurrency when different currencies are traded based on their different applications or technological advantages and disadvantages. When fundamentals, rather than pure speculation or technical analysis looking for profitable patterns in a highly volatile environment, are driving their value.
When they break away from Bitcoin or any other market leader and can stay afloat.
BTC itself is a symbol of many ills of nascent cryptocurrency. Basically, there is no functional reason for its existence, as it doesn’t really make transactions in any way better, more secure, faster, or cheaper.
It’s expensive (often unpredictably) as a means of exchange, transactions take a long time to settle (and you can buy whatever you want with the trust money you already have, which is accepted everywhere).
It has recently seen emphasis on its value storage function, but for that it should still have a unique and practical use (gold, with which it is often compared, is at least a tangible and exploitable resource).
However, since it all started, it is the “fundamental” cryptocurrency and the most widely accepted, it is still seen as the best benchmark, regardless of its technical limitations.
The decline in its importance will be one of the signs of the evolution of the industry as it is solving more problems, building a stronger case for its existence.
As today, the strong correlation not only with BTC, but even between obscure and seemingly related currencies, demonstrates the degree of sophistication of the cryptocurrency market, the future weakening of this correlation will be one of the first signs of maturation and possible general current. adoption.
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Featured Image Credit: Tom Stepanov via Shutterstock