Cryptocurrencies in a Waterfall Decline

Market Capitalization of Cryptocurrency Sector as of March 8th, 2018.

The Cryptocurrency sector continues to get shellacked.

Cryptocurrencies have lost more $100 Billion in about 48 hours, now standing at $360 Billion.  Bitcoin, at its peak, on December 21, 2017 had, BY ITSELF, a market capitalization of almost $330 Billion.  The high water mark for the market capitalization of the cryptocurrency sector was a whopping $825 Billion, according to Coin Market Cap (https://coinmarketcap.com/charts/).  After that peak, the cryptocurrecy sector lost a stunning 64% of its value over the next 30 days to hit a low of $280 Billion!  During the subsequent two weeks, the Cryptocurrency sector GAINED 85%, peaking at $520 Billion, but it only regained less than half its loss in dollar terms.

Most striking about the cryptocurrency sector is the amazingly high degree of correlation among the individual cryptocurrencies.   The correlations between some of the larger capitalization cryptocurrencies is below:             Cryptocurrency Correlation Matrix(https://www.sifrdata.com/category/correlations/)

The results can be interpreted as follows:

  • 0.5 to 1: Strong positive relationship
  • 0.3 to 0.5: Moderate positive relationship
  • 0.1 to 0.3: Weak positive relationship
  • -0.1 to 0.1: No linear relationship
  • -0.1 to -0.3: Weak negative relationship
  • -0.3 to -0.5: Moderate negative relationship
  • -0.5 to -1.0: Strong negative relationship(https://www.sifrdata.com/cryptocurrency-correlation-matrix/)
  • The matrix of correlations between cryptocurrencies is as high as .72 between Ethereum (ETH) and Digital Cash (DASH).  Surprisingly high is the correlation between the two giants, Bitcoin (BTC) and Ethereum (ETH) which is .64.
  • This is important because it means that one can not reduce risk much through normal diversification.      
  • The correlations with other asset classes including equities, gold and bonds is non-existant.  Cryptocurrencies are in a class by themselves.
  • All assets, which possess some sort of risk, are correlated with one market attribute-LIQUIDITY.   If, as we believe, stocks follow cryptocurrencies down the waterfall, one has to conclude that the unwinding of 8 years of Quantitative Easing (QE) by the Federal Reserve is at the core of why we’re experiencing what looks like one nasty BEAR.

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