Today cryptocurrencies have become a global phenomenon and lately it has been one of the hottest topics around mundane and experienced investors. The recent price rise of cryptocurrencies has given more and more reason to look in-depth on cryptocurrencies value. One of the largest selling factors (in the side of huge profits) of cryptocurrencies has been their lack of correlation to established global financial markets such as stock markets and bond markets. Correlation, in financial world means the statistical measurement of the relationship of two or more securities. Low correlation should give cryptocurrency an edge on diversifying portfolios and lowering investing loss risks. The second selling factor has been that cryptocurrency market should be decentralised meaning that there is no one entity or third party to hold customers funds. It is almost impossible to find a single large bank, accounting firm or a government that have not researched nor published a paper about cryptocurrency.
Following the release of BTC and ETH in Qidax as its inaugural cryptocurrencies in recent launch, huge market demands have propelled Qidax to further launch of other main crypto assets. Qidax has picked the top crypto by market capitalisation, XRP (3), BCH(5), LTC(8) and EOS(11). Qidax has a solid fundamental analysis framework to study on the performance of some of the top cryptocurrencies in the market and examine on their correlations.
The following figure depicts the performance of different type of cryptocurrencies against BTC. Different crypto assets are compared against BTC as BTC is kept as the main driver. Between 2014 and 2018, it can be seen most of the crypto assets have relatively weak correlation compared to BTC. The correlation between LTC and BTC is highest among other crypto classes until early 2017. From 2018 onwards to mid of 2018, majority of these crypto assets including ETH, XRP, BCH and LTC are seemed to converge to the value of 0.7–0.9 with BTC.
Qidax performed individual analysis on each crypto product:
XRP/USDT
Ripple coin was first implemented in 2004 by Ryan Fugger, a Web developer in Vancouver, B.C., Canada. In 2005, Fugger began to build Ripplepay as a financial service to provide secure payment options to members of an online community via a global network. On the basis of this protocol, a new digital currency system appeared in May 2011, for which its own crypto currency XRP was issued.
XRP broke above the neckline of the inverse head and shoulders pattern on July 25. The pattern target of a breakout from this bullish setup was 0.25. Generally, after the breakout, the price retested the neckline.
The third ranked crypto rebounded off the neckline and was consolidating on 0.29 since August. The RSI in the overbought zone suggested that the bulls were in command.
Our Qidax unique technical indicator showed that XRP price has reached its peak, at least in the current month, and if the bears sink and sustain the XRP/USDT pair below the neckline, it will be a sharp dive. This could result in a drop to 0.2 as traders who had bought following the breakout of the neckline will be forced to cover their positions.
BCH/USDT
Bitcoin Cash is a cryptocurrency forked from the original Bitcoin. It increased the block size limit to 8mb in order to make transactions faster without needing expensive fees. Bitcoin Cash is both the name of the payment system and of its native cryptocurrency. It appeared on August 1st, 2017.
Bitcoin Cash (BCH)has broken out of the 280 resistance late July, which showed that the bulls continued to buy at higher levels. The new resistance level is now 350 around the same as when BCH was in March 2020.
If the bulls can propel the 5th ranked cryptocurrency, a new uptrend is likely where it can go approaching 400. However, if the bulls fail to push the BCH/USDT, a drop to $240 is possible. A break below this level will signal weakness and will indicate that the range-bound action is likely to continue for a few more days.
LTC/USDT
Litecoin was released via an open-source client on GitHub on October 7, 2011 by Charlie Lee, a former Google employee. The Litecoin network went live on October 13, 2011. It was a fork of the Bitcoin Core client, differing primarily by having a decreased block generation time, increased maximum number of coins, different hashing algorithm and a slightly modified GUI.
Litecoin (LTC) soared above 46 on July 25 but the bulls have not been able to push the price above 65, which shows that the bears are aggressively defending the resistance of the range.
The 8th ranked cryptocurrency exhibited a very similar price profile as BCH. Market traders are likely to make another attempt to propel the price above 60. If successful, a new uptrend is likely with the first target objective at 65.
EOS/USD
EOS is a blockchain platform with the use of the delegated proof-of stake (DPOS). Whilst the open source software is developed by the Cayman Islands registered Block.one Company, the actual blockchain launch is carried out by volunteer block producer candidates. The project was completed in 2018. The project’s chief developer is Dan Larimer. EOS ICO start date: 2017–06–26.
EOS has risen to 3.5 late July followed by immediate retest on 2.6 then settled at 3. If the bulls can push the 11th ranked cryptocurrency above 3.5 a new uptrend is likely. The bears are likely to mount a stiff resistance at this level.
Correlation study on crypto pairs
Qidax explored on crypto assets by studying multiple cryptos’ pairs. A correlation heat map was built to look at the correlation on each crypto asset compared against each other. Two different timeframes are presented below showing the correlation changes from year 2018 to 2020.
BTC and ETH remains strongly correlated through these periods, at above 0.73. ETH used to be highly correlated with LTC, BCH and EOS in the late 2018 and early 2019. However the correlation between ETH and other crypto assets significantly reduced from the second half to 2019 to 2020. It can be seen that the correlation between ETH and other cryptos are below 0.45.
The least correlated pair of crypto is XRP and ETH, recorded at 0.2605.
Correlation is often used in portfolio management to measure the amount of diversification among the assets contained in a portfolio. But how do traders conduct portfolio management within cryptocurrency only? Qidax uses a measure of the correlation of all the assets in a portfolio to help determine the most efficient frontier. This concept helps to optimise expected returns against a certain level of risk. Including assets that have a low correlation to each other helps to reduce the amount of overall risk for a portfolio. This is why in the second phase release of perpetual swap, Qidax offers LTC, BCH, XRP and EOS which have least correlation compared to ETH.
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