Quantitative Look at the 2018 Cryptocurrency Market in 4 Graphs

Now that 2018 is over, I decided to take an objective look at the Crypto currency market from 4 important investment perspectives that Wall Street often looks at for most of its portfolios and investment decisions:

1. Annual Performance
2. Trading Volume (an indicator of liquidity)
3. Volatility (an indicator of uncertainty and risk)
4. Bitcoin correlations (is the crypto market diversified?)

To make things interesting, I also add in S&P (using the SPY ETF) and 5 Tech stocks (Amazon, Tesla, Google, Apple, Facebook) to provide an unique and holistic picture for investors who invest across different asset classes and non-crypto investors who are curious.

These four aspects are crucial to understand for investor success at both individual and institutional levels. The following insights provide a more rigorous layer of understanding for smaller and bigger players looking to enter the crypto markets in the future.

I’ve decided to only look at the top 50 coins by Market Cap. The volume drops really quickly even for top 50 coins and is a fair representation for any serious investor.

All the data for these insights comes from the backend to a new quantitative performance search engine I’m building at https://stockquanta.com.

1. 2018 Performance

Everyone knows 2018 was bad. Among the top cryptos, BNB fell the least (around -34%). For the crypto market, that is impressive. BTC fell by -73%, which actually correlates to its long term volatility! (see below). Some coins like SALT lost almost all of their value! Note that VET is an anomaly below because of their coin swap during the year.

S&P fell -4.6% in retrospect. Amazon and Tesla did well. Facebook’s fall was bad at -26%. But it was still ahead of BNB. There remains a gap between the worst crypto performance and worst stock market performance (for top assets, ignoring the low volume coins). This is mainly attributed to the high volatilities in the space due to various market dynamics and fair price discovery issues (which IMO is a function of adoption and real-world use) that the crypto market is still grappling with. As and when the latter improves, this gap should decrease.

2. 2018 Volume in US Dollars

BTC volume for 2018 was around 1.3 Trillion dollars! SPY volume (which is a major ETF for trading S&P 500) was 6.5 Trillion dollars. They are comparable within the same order of magnitude, which is impressive in its own right.

SPY, Amazon and Apple: all had higher volume than BTC in 2018.

Ethereum’s volume was comparable to Tesla and Google at 670 Billion dollars!

The other thing to note is that trading volume even for top 50 coins drops really fast! 2018 Volume for one of the top coins XMR (Monero) was $49 Billion, which is around 4% of Bitcoin’s volume. This is a major concern with crypto currency markets compared to stock markets, where investor interest is highly skewed among coins. A separate graph below this one shows the volume for smaller coins more clearly.

There are only a few coins that could attract higher institutional interest, for liquidity reasons. But this may change in the future if the adoption challenge can be solved in 2019.

Coins by Volume for the smaller coins with volume < $50B for 2018.

3. 2018 Return Volatility

What is volatility? In simple terms, it indicates uncertainty in returns when projected to 1 year. More uncertain the returns are, more riskier the investment is deemed to be. It is not the same as Loss. Something could loss a lot of money in a predictable fashion, thus still having low volatility.

The graph below shows the volatility for all crypto currencies along with Tech stocks.

SPY’s 2018 volatility was 17%. This is higher than its long term average which can be around 11–12%. Bitcoin’s volatility was 82%. Which surprisingly isn’t that far from the value it lost in 2018. Annual volatilities tend to be a fairly good indicator of how much performance could vary in practice.

All stocks shown here have lower volatility compared to crypto currencies. Tesla had a volatility of 59% (3.5x S&P!), which is pretty high for a big stock. But it’s much lower than BTC.

As we go look at other coins, volatilities go up drastically. For example, NANO had a volatility of 177% which fits its turbulent year. Yes, volatility can be above > 100% and in fact is very common for almost all crypto-currencies, indicating the amount of performance uncertainty involved in trading them. 2018 Volatility for BCD was 1244%! (BCD is Bitcoin Diamond)

4. 2018 Correlations and Diversification

Lastly we come to an often talked about rumor: that crypto markets move alike to BTC and to each other. This can be approximated by the measure of correlations. Quite simply, it measures how do investments move with respect to each other. A correlation of 100% means they move in tandem for all days, and 0% means they are completely independent. A mix of low correlations, good performance and low volatility are important for diversifying well!

Here we show a chart of top 50 coins and their correlation to BTC. Almost all crypto correlations to BTC are > 50%. This is quite high and not that surprising. LTC’s correlation was 85% (!), the highest. ETH is closely behind, indicating that having both BTC and ETH in your portfolio isn’t diversifying much in practice, though if your long term views are different and strong, it may still make sense.

Another interesting fact is that S&P correlation to BTC is quite low at 6%. All the other stocks have even lower correlation except Google, which has a correlation of almost 8%. The overall conclusion is that the crypto markets did move quite independently of the stock market in 2018, and if crypto performance and risk are appealing in the medium to long term, they may serve as good diversifying assets beyond Stocks.

Final words: Thoughts on decentralization, price stability and fair value

This is not a complete view of the crypto market (along with the tech stocks and S&P) by any means. But these four aspects (Performance, Volume, Volatility and Correlations) are important to all crypto and non-crypto investors looking to understand crypto markets. While the decentralized nature of crypto currencies is often emphasized as pre-cursors to financial stability and independence, in practice volatility and herd mentality (as indicated by correlations) is still quite extreme for larger investors to jump in responsibly. Some concrete things need to happen so that these issues can be addressed, but that’s a topic for another post!

In brief, it’s critical to have an objective “fair value” mechanism that goes beyond consensus driven approaches to price determination. The extreme reliance on decentralization for crypto markets is both a blessing and curse, at least in the short term.

About the Author

Ashish Gupta is a former Google and Wall Street data scientist. He built Machine Learning models for Conversion Optimization for AdWords and wrote systems for algorithmic trading in Equity Options. He is currently creating https://stockquanta.com (and http://coinquanta.com) with the goal of finding great trending investments with quant insights like above painless. He can be reached at ash@stockquanta.com or on Telegram at nyrulez.

Quantitative Look at the 2018 Cryptocurrency Market in 4 Graphs was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.