Pandemic Has Accelerated Crypto Market’s Transformation Into Commodity Market

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The cryptocurrency market is beginning to consolidate and is becoming increasingly similar to the commodity market, with increased correlation between cryptocurrencies coinciding with the early stages of the COVID-19 pandemic, according to researchers from Institute of Nuclear Physics subordinate Polish Academy of Sciences (IFJ PAN).

Statistical analyzes conducted by these researchers indicate that the global market is maturing. From the point of view of statistical analysis, the scientific institution said in a statement summarizing the findings in the research paper that the cryptocurrency market can serve as an alternative to investments in other financial markets.

With cryptocurrencies, for the first time in history, scientists can conduct a complete quantitative analysis that traces the dynamics of the financial market “from its inception to nearly full maturity,” said Stanisław Droido, Ph.D., professor at the International Federation of Journalists. Krakow University of Technology, who co-authored the paper.

The research answers the question of possible connections between a particular cipher:

  • If the returns of one cryptocurrency change, how will the others act?
  • Will a rise in the price of one cryptocurrency be accompanied by a rise in the price of another cryptocurrency, a decrease in prices, or a lack of interdependence?

The paper studies a high-frequency price-return time series representing 80 cryptocurrencies that were the most traded on the major cryptocurrency exchanges Binance, focusing on the skewed cross-correlation structure of the cryptocurrency market in different time periods.

The researchers admit that their analysis includes “only a small portion of all cryptocurrencies in circulation, which exceed 7,500,” but claim that “the less well-known and less capitalized a cryptocurrency is, the less liquid and less reliable the relevant data is.” So, they argued, Limiting their analysis to more capitalized cryptocurrencies was “crucial.”

Jaroslav Kwabic of IFJ PAN, Ph.D., co-author of the research, found that:

“The quantitative characteristics we conducted prove that different cryptocurrencies no longer operate independently. They not only “see” each other, but also interact with each other. Their market today is more interconnected.”

The researchers determined that because of these qualities, the crypto market today resembles the behavior of stock prices, which show a strong correlation with each other. This is also caused by the psychology of investors and the algorithms used in cryptocurrency trading.

Besides the interrelationships between markets, the paper also analyzed the skewed interrelationships between the cryptocurrency market and some traditional markets, such as stock markets, commodity markets, and forex.

The statement said the increased correlation between cryptocurrencies coincides with the early stages of the pandemic, “which may be related to the heightened tension among investors at that time.” With this in mind, it was “natural to ask ‘whether the market’ thus constituted as a whole has shown any relationship with other known global financial markets,” such as the US stock market and the oil markets.

During the analysis period (January 1, 2020 – October 1, 2021), the crypto market showed the strongest correlation with the Standard and Poor’s 500 (S&P500) US stock market index, which tracks the performance of 500 major companies listed on the American stock exchange.

Marcin Wątorek, Ph.D., researcher from Cracow University of Technology and co-author of the research paper, noted the following:

“Synchronization can also be seen with other commodity markets such as oil, copper and gold. This is a very interesting finding as there were no such correlations prior to the pandemic and the cryptocurrency market was generally seen as decoupled from traditional financial markets.”

The research paper concluded that cryptocurrencies are becoming “more and more strongly interconnected than they were before,” adding:

“The cryptocurrency market is showing higher levels of cross-correlation with other markets during the same turbulent periods, as it strongly correlates with itself.”

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Learn more:
IMF Economists: Cryptocurrencies Aren’t on the Fringes Anymore, Correlations with Stocks Pose Risks
Most cryptocurrencies are tied to stocks, not gold – Analysts

Cryptocurrency markets cut losses, US dollar rises as traders digest Fed statement
How the Global Economy Could Affect Bitcoin, Ethereum and Crypto in 2022

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