Statistical Analysis Reveals Ties That Bind the Cryptocurrency Markets

Predicting the price movements of cryptocurrencies is a dark art that combines technical and fundamental analysis with an understanding of human psychology. A recent analysis dispels a little of that darkness by revealing the interdependence of altcoins. Its findings? When altcoins fall, they often fall in unison.

Traders are well aware of the effect bitcoin’s movements have on the cryptocurrency markets. The price of bitcoin rises and falls like the tide, with altcoins the sand upon the shore. While the tide’s out and bitcoin is low, alts consolidate. Then bitcoin gathers momentum and comes charging back towards the shore. Every new all-time-high crashes further up the beach, displacing the sand as it lands. Alts get sucked down by the surf, before crashing back onto the beach, higher than when they first started.

Analogies are all well and good, but they’re of little use when it comes to formulating an effective trading strategy. Mathematician Monika Monstvilaite has undertaken a more scientific approach to understanding the markets, explaining:
In “Statistical analysis of cryptocurrencies using actual math” she explores the relationship between different cryptocurrencies. Ms Monstvilaite uses Kendall’s τ, a coefficient for measuring the association between two measured quantities. The tree graph she’s produced shows the link between various cryptocurrencies and the extent to which the movement of one can influence the other.

Statistical Analysis Reveals the Ties That Bind Cryptocurrency Markets

The key takeaway from her analysis? “Most cryptocurrencies are dependent when they perform badly, but relatively independent when they do well. In other words they are likely to “crash” at the same time, on the other hand they tend to increase independently.”

This won’t be revelatory to anyone who’s familiar with the markets; when bitcoin surges, red candles across the board are commonplace, as alts struggle to keep pace. Having this confirmed by mathematical analysis may help when it comes to spotting the warning signs that altcoins are about to take a tumble. She concludes by speaking of the asymmetric nature of cryptocurrency markets, warning: “Even with a diversified portfolio there is a risk of losing a relatively high proportion of your investment even during a time period as short as one day.”