Cryptocurrency may not be as separate from traditional financial markets as some investors assume.
New research suggests that movements in digital coins are increasingly connected to forces that also affect technology shares and the wider stock market.
The finding matters because investors sometimes view cryptocurrencies as an alternative to ordinary financial assets. If both respond to similar risks, holding them together may not provide as much protection against market swings as expected.
Matthew Brigida of SUNY Polytechnic Institute studied weekly information from 253 cryptocurrencies, covering more than 97% of the market’s total value. The analysis appeared in Finance Research Letters.
Instead of looking only at Bitcoin, the research examined patterns across a large group of digital currencies. It tested whether their returns could be explained by factors associated with cryptocurrencies themselves and by factors familiar from stock investing.
The results showed links with technology-related movements and broader stock market conditions. This suggests that enthusiasm or concern spreading through traditional markets may also influence digital assets.
The study also considered investor sentiment, the movement of money between Bitcoin and smaller coins, and security breaches. These factors may help explain why some cryptocurrencies behave differently from others.
One notable result involved size. Smaller cryptocurrencies were associated with higher expected returns during the period studied. The model estimated a 22.4% annualized price of risk linked to the cryptocurrency-size factor.
That figure does not mean small coins will reliably gain 22.4% each year. It is a statistical estimate from the study’s model, and smaller digital assets can be extremely volatile or lose much of their value.
The research offers a clearer picture of how cryptocurrency markets may be changing. Further studies will need to test whether the same patterns hold over longer periods and through different market conditions.
Cryptocurrency prices can change quickly because of regulation, market sentiment, trading activity and technological developments. That makes it difficult to identify one simple explanation for their behavior.
By examining a broad collection of coins, the study tried to separate common patterns from events affecting only one asset. The research also illustrates why past returns should not be treated as guaranteed future profits.
A factor that helps explain historical prices may weaken or disappear as the market changes.
Investors and researchers can use the findings to ask better questions about risk, but the analysis is not a forecast for any particular cryptocurrency.
Further work will help determine how broadly these findings apply beyond the conditions examined in the original research.
If you are interested in this topic, please read articles about What Investors Pay Attention to Can Predict Where the Market Is Heading, and How Investor Emotions Could Solve a Big Mystery in the Stock Market.
For more information, please see articles about Why Dark Pool Trading Could Make Stock Market Crashes More Likely, and History Is Full of Failed Attempts to Establish New Currencies So What Makes Crypto Different.
Source: SUNY Polytechnic Institute.
