Edward W. Mandel
Apr 7, 2019

It’s hard getting rich arbitraging currencies. Notice I didn’t say “cryptocurrencies.” Currencies in general, and reserve currencies in particular, tend to stay within very close trading bands with one another barring some catastrophe. That’s because they’re all behaving like stores of value which is, after all, their job.

It’s not much different with crypto, which is still trying to prove its capacity to store value. That role has been taken on by such stablecoins as tether and gemini which are pegged 1:1 to the U. S. dollar, or stasis and biteuro which match the euro, or dai which represents a basket of reserve currencies. Meantime, bitcoin remains the digital asset with the highest market cap by far, and altcoins quickly fell into lockstep with it in terms of relative value since ether launched in 2015. You’re more likely to make money arb the dollar-denominated price of litecoin on Binance against its dollar-denominated price on Coinbase than you are to buy it low on Binance with bitcoin then sell it for bitcoin on the same exchange.

But that might be changing. No Exchange is going to tell you what or how or how much to trade. But we’re in this game too, and we try to keep up with trends. And from what we’re seeing now, cryptocurrencies don’t seem to be trading like other currencies at the moment. Instead, they might be starting to trade more like equity, with each token appreciating and depreciating relative to one another and relative to reserve currencies — based on their unique fundamentals, with technically-driven traders anticipating these movements based on price and volume trends.

The Binance report

Someone at Binance with a lot of time on their hands wrote up an 11-page research paper on this, but the net-net of it is that large-cap crypto assets declined last year in terms of correlation with bitcoin, but increased in terms of correlation to the dollar. It’s worth a read.

Proceeding from the caveat that 2018 wasn’t a typical year for crypto market and that the 15-month period that informed the study should prompt us to further analysis over longer time horizons, the report noted that the rise of stablecoins among trading pairs — at the expense of bitcoin — had a lot to do with this trend.

A lot, but not everything. Where the tokens trade and how their blockchains are structured have a role in correlations as well.

“Additional factors beyond project-specific news and catalysts may influence the strength of correlations among cryptoassets,” according to the authors, including the “’Binance Effect’, [that is.] digital assets listed on Binance oftentimes have higher correlations among themselves. [Also.] ... the type of consensus mechanism could impact the correlation between returns of cryptoassets (e. g., returns of PoW coins exhibited higher correlations amongst themselves than with non-PoW coins).”

But despite the incipient diversion of cryptocurrency values, the report points out the obvious: Bitcoin remains the “bellwether of the industry” and a high degree of correlation continues.

This is a good thing

The trend toward decoupling from bitcoin augurs positive signs for the crypto market in general. I agree with what journalist Cole Petersen says about it. (For such a young kid, he strikes me as really insightful.

“Analysts and investors alike have long viewed the notoriously high correlation between nearly all cryptocurrencies as a sign of the market’s immaturity, as only seldomly do individual altcoins move on their own accord regardless of the overall market conditions,” Petersen writes in NewsBTC. “The [Binance] report importantly notes that the correlation of returns between various altcoins and Bitcoin over the past three months has been fading significantly.”

As players come to recognize the crypto market’s growing maturity, you’d expect sidelined money to be introduced — or reintroduced.

What about ICOs?

Still, those founders seeking to fund their projects via ICOs of security or utility tokens won’t be among the first to benefit.

separate INSEAD study explains how ICOs tend to remain tightly correlated with bitcoin.

“Our assumption is that there will be a positive correlation with returns on other cryptocurrencies because ICOs tend to rely on a similar infrastructure (many ICOs rely on Ethereum, for example). At the same time, the correlation cannot be too high given that the business model of Bitcoin or Ethereum, as alternative payment systems or token platforms, is quite different from the business models of most ICOs,” according to authors Antonio Fatas and Beatrice Weder di Mauro. “We study this correlation empirically by collecting data on the pricing of the largest 50 ICOs and test whether the behaviour of ICO returns are correlated to the returns of Bitcoin and Ethereum. If ICOs are truly pricing their unique business models, we would expect their returns to be idiosyncratic with low correlations. If, on the other hand, they are simply seen as an investment vehicle to generate excess returns based on a ‘cryptocurrency bubble’, we would expect them to be highly correlated to prices of the major cryptocurrencies.”

I won’t keep you in suspense. Fatas and di Mauro found little correlation prior to the crypto bubble bursting in early 2018 but, from that point forward, the correlation between ICO values and the two largest cryptocurrencies tightened. Then they remained tight even as markets stabilized.

The authors leave it to us to explain why that would be. The “benign” explanation is that investors tend to conflate these two new, technologically linked yet economically distinct markets. As they mature, investors will become more savvy and be able to parse the differences between ICOs and true cryptocurrencies such as bitcoin and ether.

The other interpretation “is that ICOs were just one of the children of the hype and are likely to share the fate of major cryptocurrencies.”

The view of the BQT team is that the explanation isn’t an either-or. It could be a blend of both. As far as I’m concerned, we established an entirely new asset class, cryptocurrency, 10 years ago when bitcoin debuted. Since then, we’ve launched two more in a related space — security and utility tokens. These assets have similar code, sure, but they are very different from each other. And within these classes, each issuer has their own use case and, thus, their own value proposition. And I’m not even talking about crypto futures, crypto EFTs, non-fungible tokens, central bank digital assets or any number of other different flavors of digital assets.

It takes sophisticated investors to parse all these distinctions. As these assets diverge in terms of their relative strength indexes, there will be more and more need for dexes that allow for the kind of nuanced thinking that informs well-considered — and well-hedged — transactions. And, as the universe of sophisticated investors grows, we stand ready to welcome them to our platform very soon.

Edward is an Ernst and Young Entrepreneur of the Year Finalist, Blockchain Enthusiast and visionary behind many successful organizations. An avid entrepreneur, Edward has a knack for designing distinctive business models complemented with superior technology to deliver unparalleled service and profitability. Edward also has been advising and consulting for various successful Blockchain technology and ICO projects and recently launched his own BQT.IO P2P exchange helping traders connect with each other to leverage their crypto assets.

BQT.IO has been in development since March 2017 and its ICO launched September 18. The information can be found online at BQT.IO, on Telegram @BQTCommunity and on Twitter as @bqt_ico.