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Pandemic Has Accelerated Crypto Market’s Transformation Into Commodity Market - Research

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

Statistical analyses carried out by these researchers suggest that the global market is maturing. From the point of view of statistical analysis, it is becoming more and more evident that the crypto market can be an alternative to investments in other financial markets, the scientific institution said in a statement that summarizes the findings presented in the paper.

Owing to crypto, for the first time in history, scientists can perform a full, quantitative analysis that tracks the dynamics of a financial market “from its inception to virtually full maturity,” said Stanisław Drożdż, Ph.D., Professor at the IFJ PAN and the Cracow University of Technology, who co-authored the paper.

The research answers the question of potential correlations between particular cryptos: 

  • If the returns of one cryptocurrency change, how do the others behave?
  • Will price increases in one cryptocurrency be accompanied by rising prices of other cryptos, decreasing prices, or there is no interdependence?

The paper studies a high-frequency time series of price returns representing 80 cryptos that were the most actively traded on major crypto exchange Binance, with a focus on the detrended cross-correlation structure of the crypto market at different time intervals.

Researchers admit that their analysis comprises "only a small fraction of all traded cryptocurrencies, whose number exceeds 7500,” but they claim that “the less well-known and less capitalized a cryptocurrency is, the less liquid and less reliable are the related data." Therefore, they argued, restricting their analysis to the most capitalized cryptocurrencies was "crucial."

IFJ PAN’s Jarosław Kwapień, Ph.D., the paper’s co-author, found that:

“The quantitative characterisations we have performed prove that the various cryptocurrencies no longer function independently. They not only 'see' each other, but also interact with each other. Their market today is becoming more and more correlated.”

Researchers determined that, owing to these qualities, today’s crypto market resembles the behavior of stock prices, which show a strong correlation with each other. This equally results from the psychology of investors and the algorithms that are used for crypto trading.

Besides the inter-market dependencies, the paper also analyzed the detrended cross-correlations between the cryptocurrency market and some traditional markets, like the stock markets, commodity markets, and Forex.

The increased correlation between cryptocurrencies coincides with the early stages of the pandemic, the statement said, "which may be related to the greater nervousness among investors at that time.” With this in mind, it was “natural to ask" if the market "thus formed as a whole showed any correlation with other well-known global financial markets," such as the US stock market and oil markets.

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

Marcin Wątorek, Ph.D., a researcher from the Cracow University of Technology and of the paper’s co-author, noted that:

“Synchronisation can also be seen with markets for other commodities such as oil, copper and gold. This is a very interesting result as there were no such correlations before the pandemic and the cryptocurrency market was generally considered as separated from traditional financial markets.”

The paper concluded that cryptos are becoming “more strongly cross-correlated among themselves than they used to be before,” adding: 

"The cryptocurrency market shows higher levels of cross-correlations with the other markets during the same turbulent periods, in which it is strongly cross-correlated itself."


Learn more:
- IMF Economists: Crypto Is Not on the Fringe Anymore, Correlation with Stocks Poses Risks
- Most Cryptos Correlated with Stocks, Not with Gold - Analysts

- Crypto Markets Trim Losses, US Dollar Rises as Traders Digest Fed Statement
- How Global Economy Might Affect Bitcoin, Ethereum, and Crypto in 2022 

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- Investors Are Still Free To Use Binance, Says Polish Regulator