Bitcoin Price Evolution

Introduction 

This blog post is going to make an assessment on the bitcoin price and attempt to predict how the BTC is going to perform the next three months. Since mid October 2020 there has been an insane accumulation of Bitcoin from Whales.

BTC accumulation

In the image below we can see the accumulation from May 2020 (10k > BTC accumulation) [1]:

As we can see the accumulation becomes massive after November 2020 and climaxes on December 2020, were BTC ATH is achieved. Now the diagram above includes all accumulations starting from 10k plus and therefore it should be very clear that the accumulation that takes place is related to institutional entities buying large quantities and not retail investors.

In the image below we can see the accumulation on December 2020 (10k > BTC accumulation) [1]:

Above the chart demonstrates that December accumulation becomes stronger with small gaps. My assumption is that, when the BTC was going sideways (which was happening for weeks) the whales stopped accumulating and used multiple buy/sell orders to stabilize the price using bots. 

To be more specific, my opinion is that there are three types of buyers:

• Large institutions e.g. financial institutions.
• Wealthy accumulators e.g. treating BTC as value storage asset.
• Retail investors e.g. treating BTC as value storage asset.

The types of players that manipulate the price is the infamous "Whales" aka. the large institutions. Because the BTC market is relativity small (gold is $9 trillion and the SPDR S&P 500 ETF only is $316,359,000.00) financial institutions can relatively easy with small amounts decrease/increase the  BTC price. The wealthy accumulators do play a significant role to the increase of the buy pressure, but they also seem to not accumulate BTC directly from the exchanges (e.g. accumulate from the miners directly etc.) 

In the image below we can see the accumulation on December 2020 from 0.1 to 10 BTC [1]:

Above the chart demonstrates that the accumulation from retail investors is steady and smooth, since May 2020, with slight increases. If the retail investors were defining the BTC price, there would not be any strange movements, the price would have progressed naturally. 

BTC exchange reserves

In the first part we talked about the fact that Whale accumulation increased dramatically, but we did not talk at all  about the exchange reserves. Exchange reserves are not affected directly with "Over-the-counter" (OTC) BTC trading. My assumption is that despite BTC trading near all-time highs, more institutions continue and will continue to buy BTC using OTC trading firms to keep their purchases from impacting the overall market. The only reason for Whales to buy through OTC is pure price manipulation and nothing else. On the other hand wealthy individuals seems that also look into OTC trading for long term accumulation too.

Below we can see the rapid reduction of the BTC reserves in the Cryptoquant daily chart:

Below we can see the rapid reduction of the BTC reserves in the Cryptoquant hourly chart:

Above we can see a massive drop of the exchange reserves, we can also conclude that this demonstrates a very long term bull market. 

Below we can see the rapid reduction of the BTC reserves compared to ETH reserves in the Cryptoquant daily chart:

Note: It does also worth mentioning that ETH has a 93% correlation with BTC and it seems that ETH price is much more suppressed than BTC. Also ETH price has not reached ATH yet and we can easily conclude that its price is more predictable.

BTC Price prediction

Below the chart shows the BTC realized price (shows the average price of all unspent bitcoins) were bought for and the MVRV indicator. Refer to Coinmetric's article for more details on MVRV. MVRV is bitcoin price/realized price. When MVRV is more than 1, bitcoin's price is undervalued. 

The above diagram shows that for 2020 only March was the month that BTC was considered as undervalued. The type of investors/traders that can analyse this type of information and act in real time is mostly Whales. Also March of 2020, was a very good benchmark for BTC, that did not go unnoticed by many institutions. BTC and gold are a few of the assets that managed to bounce back very fast, during the COVID-19 pandemic. It is not luck that Micro Strategy that specializes in data analytics, started buying BTC like crazy. 

Below we can confirm the analysis above, by having a look in the Binance Order Book Data. The yellow lines are places where whales have placed large orders, source is from TradingLight . 

In the short term, it looks like there is a high chance that BTC will continue to consolidate or have two to three more major corrections, until March 2021. Retail investors are very active, but the whales are moving in ways that aren’t helpful to keep bitcoin rising.

Day traders should realize that markets are currently overheated. Markets have moved up investment has made markets dangerous. On the other hand, buying BTC as a long term investment to hold until next year now seems like a good decision. BTC, in the middle of next year, will surpass $30,000, according my calculations.

The previous chart is also confirmed from the trade pattern analysis provided by Cryptometer [3]. Cryptometer give us access to pattern analysis data, through their API service. Below we can see large numbers of transactions with fixed quantity, executed on multiple exchanges.

Exchange Inflow/Outflow

Below we can see the from CryptoQuant a chart that shows the mean inflow from four plus exchanges:

The mean inflow essentially shows that when it was increased on March 2020 the price dropped to ATL for 2020. This means that the top players and later on, the retail investors transferred money to their exchange wallets to sell BTC and therefore the inflow mean increased. 

 

The mean outflow essentially shows that when it started decreasing after 18th of November 2020 the price started increasing to ATH for 2020. This means that the whales expect prices to rise, and they withdraw from exchanges in large amounts as they don’t need to trade and prefer to hold bitcoin in non-custodial, safe wallets. This can help us conclude that there is an opposite correlation between outflow mean and BTC price. Below we can see the hourly outflow mean.

Note: Above we can see some mean outflow spikes that clearly affect the BTC price negatively.

BTC price range 

After careful observation using trading view diagrams we can see that BTC price is fluctuating in a range of 2000 dollars. Below we can see a weekly chart.

It seems that BTC in the weekly chart created some relatively strong support lines in:

• 19187.83 dollars (Support line)
• 18193.82 dollars (Support line)
• 15907.63 dollars (Support line)
• 13720.82 dollars (Support line)

Below we can see a day chart:

We can see that the support lines from the weekly chart, can be confirmed also by the day chart.

Conclusion

The BTC bull rally of 2020, has nothing to do with the 2017 bubble. BTC is widely accepted as storage of value asset. I am under the impression that the Whales are just postponing the price increase of the BTC and are not interested on suppressing the value for the long run. The BTC price is going to continue increasing until the end of 2021 and the most benefited are the BTC holders. Trying to scalp BTC simply does not make sense. BTC estimated price would be 30000 dollars plus.

This is a visualization of the price:

 

References:

• Whales Map [1]
• CryptoQuant [2]
• Cryptometer [3]

Matic Netowk (MATIC) Analysis

Introduction

Matic Network has been a project on my radar for quite some time now, but one that I have never had the opportunity to spend any time properly researching. The article audience is intended to be technically savvy investors e.g. developers and Information Technology people.

For those who’d like to learn a little more about Matic Network prior to reading this report, here are some primary links:

• MATIC
• MATIC Twitter
• Medium
• MATIC Telegram
• MATIC Linkedin

This article might get updated, so stay tuned, and is meant to provide a holistic overview of Matic Network for readers, both old and new to Matic Network.

Fundamental Analysis/ Metrics

Name: Matic Network 

Ticker: MATIC

Token Type: ERC-20

Validator Method: PoS

Platform: Ethereum blockchain only (currently)

Category: Mid cap

Transactions Per Second: up to 10,000 (internal test-net)

Note: As of 30/11/2020 Ethereum can only process on average about 14 transactions

Consensus Mechanism: Plasma + Proof of Stake (implemented in Bor component)

Sector (Use cases): Payments, Decentralized Exchanges, Gaming Networks

Exchanges: Link

Head Quarters (HQ): Bengaluru, Karnataka (India)

Number of employees: 61 employees (Linkedin - 28/Nov/2020)

Two year growth: 281%  (Linkedin - 28/Nov/2020)

Company year founded: 2017

The company HQ is in India (not a big fun of India as a tech startup place). The most impressive part is that Matic Network has a growth, based on the Linkedin Insights Premium service, of 281%. The after mentioned percentage refers to the employee growth. The company started with 16 employees on Nov 2018 and reached 61 employees on Nov 2020. 

The company employee ratio, based on specialty seems to be well balanced, see below:

We can see from above that the company takes Marketing (17% of total employees) and Social Media presence (15% of total employees)  seriously. The LinkedIn profile is populated with frequent posts adding a professional look to the company, most recent post was 4 days ago. The company official blog also looks to be updated frequently. Another interesting fact about the company is that 7% of the employees is dedicated to education (e.g. by producing high quality educational content). From the above we can conclude that Matic Network is moving to the right direction, by pursuing fast market adaptation, through marketing, social communities and education. The Matic Network has a very well designed web site and a lot of material on their products. The only negative aspect is that, Matic Network is entering multiple highly competitive markets such as payments and gaming, limiting their chance to succeed.      

Launch Overview

Matic Network was conceptualized on 2017 by Jaynti Kanani and Sandeep Nailwal. Matic Network launched a private/pre-sale on  1/Jan/2018 that ended on 31/Dec/2018. They also launched their IEO on 24/Apr/2019 and ended on 26/Apr/2019. 

What is the Matic Network[1]:

"Matic Network provides scalable, secure and instant Ethereum transactions using Plasma side chains and a Proof-of-Stake network." [1]

Matic Network MATIC IEO Review [4]:

IEO price: $ 0.00263

ROI since IEO: USD: 6.98x  (+598.4%)

ATH ROI since IEO: USD: 17.19x  (1618.9%)

Tokens For Sale: 1,900,000,000

Hard Cap: $ 5,000,000

Matic Network MATIC ICO (Private-Sale/Presale) Review [4]:

Private/Pre-sale price: $ 0.00263

ATH ROI since Private/Pre-sale: USD: 17.19x  (1618.9%)

Lock-up: 50% unlocked in the first month of Private-Sale/Presale, remaining 50% unlocked in the seventh month

Note: The top 100 holders collectively own 97.44% tokens of Matic Network

Address token allocation:

Token Economics

Circulating supply (market cap): $86,879,574.00

Total Supply: 10,000,000,000 MATIC

Holders: 19,960 addresses

Total Hard Cap: $5,600,000

For sale: 3,230,000,000 (32.30%)

Public sale: 1,900,000,000 (19.00%)

24-hour trading volume: $11,186,210 (source coingecko)

Most active market: Binance

Note: Hard cap is defined as the maximum amount of money a cryptocurrency can receive from investors in its Initial Coin Offering (ICO) [5].

Token Staking

MATIC Token Investors can leverage their crypto via staking. Currently there are 3 options to earn passive income and staking rewards with your Matic Network. This can be done through:

1. Delegate Matic
2. Run validator
3. Lend Matic Network

Run validator

At this point is important to clarify that validators stake their Matic tokens as collateral to work for the security of the network and in exchange for their service, earn rewards [1].

Matic will be allocating 12% of its total supply of 10 billion tokens to fund the staking rewards. This is to ensure that the network is seeded well enough until transaction fees gain traction. These rewards are primarily meant to jump-start the network. While the protocol in the long run is intended to sustain itself on the basis of transaction fees [1]. Below you can see the reward formula:

Validator Rewards = Staking Rewards + Transaction Fees

This is allocated in a way to ensure gradual decoupling of staking rewards from being the dominant component of the validator rewards [1]. Rewards are distributed to all stakers proportional to their stake at every checkpoint with an exception being the proposer getting an additional bonus. User reward balance gets updated in the contract which is referred to while claiming rewards [1].

Delegate Matic

Delegators are token holders who cannot, or do not want to, run a validator node themselves. They can delegate staking tokens to a validator and obtain a part of their revenue in exchange. Because they share revenue with their validators, delegators also share risks. Should a validator misbehave, each of their delegators will be partially slashed in proportion to their delegated stake [19]. 

Lend Matic Network

You simple give resources to MATIC network by installing related software.

stakingrewards.com did us a favor and added MATIC staking calculations:

Matic Partnerships

Matic Network first partnered with Blockchain Foundry [9], in order to increase their know how. Moving forward they partnered with Ankr Network [10] to help them set up a staking network. This shows strong appetite for fast adaptation again. Also most partnerships took place on 2020. 

Below you can see most of the partnerships that took place in 2020:  

    

Social Media Presence 

Twitter followers: 58.4K Followers

Telegram: 29912 total members

Telegram: 1245 online

The Telegram community is active and healthy (e.g. members do not exchange cooking recipes etc.). Matic Network has multiple Telegram channel (their main channel has 29912 members). Same applies for Twitter. 

Technical Analysis

All time high (ATH): $0.023778

All time low (ATL): $0.015362

Major resistance line: $0.022350

Major support line: $0.00995

Tradingview set to 45 min with indicators RSI Candle and 9 day WMA:

From the diagram above, we can see that when Matic Network token was released, went from the initial coin release hype to a new higher high, this shows the potential for great growth. As already reported the company does have good token economics and low inflation. I am suspecting that one of the reasons that Matic Network push forward so hard is because they want to fully exploit the current Bitcoin bull market. 

60 day trading volume from cryptometer:

Technology Overview

Matic Network solution solves the scalability issue by transferring assets from the base chain to another  (called the “sidechain”), while ensuring asset security using the Plasma framework and a decentralized network of Proof-of-Stake (PoS) validators, so as to avoid miner centralization [1].

Key Features & Highlights

• Scalability: Fast, low-cost and secure transactions on Matic side-chains 
• High Throughput: Achieved up to 10,000 TPS on a single side-chain on internal test-net
• User Experience: Smooth UX and developer abstraction from main-chain to Matic chain
• Security: Matic chain operators are themselves stakers in the PoS system
• Public Side-chains: Matic side-chains are public in nature (vs. individual DApp chains), permission-less and capable of supporting multiple protocols

Matic Network Wallet

Matic Network has it own wallet created. With Matic Network wallet you can send, receive and manage Ethereum-based ERC20 crypto tokens. It also allows you to interact with Web 3 based decentralized applications (DApps) powered by Ethereum. The wallet seems to support only ETH and MATIC tokens. The app has a 3.6 score in Google Play and 10,000+ installs so far (30/11/2020). The UI is decent and it can connect with Dapp applications through QR scans. It also integrates with WalletConnect. Matic Network  does not seem to have frequent updates as the last update of the wallet was on November 26, 2019.

Architecture Overview

Matic network consists of three core components:

• Heimdall
• Bor
• Contracts

Heimdall is the heart of the Matic system. It manages validators, block producer selection, spans, the state-sync mechanism between Ethereum and Matic and other essentials aspects of the system. The Bor node or the Block Producer implementation is basically the side-chain operator. For the Matic network's Proof of Security based consensus, all the proof verification and handling of staking, rewards are executed on the Ethereum smart contract [1].

Github Repository/Code Overview

Heimdall (28/Nov/2020):



Most recent change: 2 months

Oldest change: 2 years

Programming language used: GO

Installation process: Easy

Bor  (28/Nov/2020):

Most recent change: 8 days

Oldest change: 4 months

Programming language used: Go/ Shell Scripts

Open source third party components: Used 

Installation process: Easy

Contracts  (28/Nov/2020):

Most recent change: 5 days

Oldest change: 17 months

Programming language used: Go

Installation process: Easy

Note 1: External component dependencies for all components: npm, go1.11+, truffle, rabbitmq (including all related Ethereum tools).

Note 2: Developer documentation excellent. 

Before we continue, I think it would be better to say a few words on why Matic Network choose Go and if this choice is aligned with their goals. Go was designed at Google in 2007 to improve programming productivity in an era of multi-core, networked machines and large co-debases [17]. So the main goal of Go is not to build user interfaces (UI) and improve user experience (UX), something potentially desirable for DApp applications, but for speed through concurrency. So Go is used mainly for server programming, which does prove that Matic Network did make a good choice. The negative aspect of this choice is that Go is relatively new language, with multiple bugs (including security bugs). 

Security Considerations

Matic Network joined a bug bounty program in Hackerone 6 months ago for the test network. Since the company has joined the program seven security issues have been reported. The total bounties paid is $2000, and below we can see the reward scheme: 

• $300 for Low findings
• $1500 for Medium findings
• $3000 for High findings
• $5000 for Critical findings

Based on the total number of bounties paid we can safely assume that only low and maybe medium issues have been found. The interesting part is that the average time of first response (after initial security report is received) is 6 hours, which is fast. So far seven issues have been identified (seven successful submissions) and six have been resolved (meaning that most security issues are patched). 

Below we can see indicative examples of valid attacks that could be attempted on Matic Network:

• Double spend by getting the clients to accept a different chain
• Double spend by validating malicious blocks
• Tamper/manipulate blockchain history to invalidate transactions
• Cause network to mint tokens to own account
• Undermine consensus mechanism to split the chain
• Censorship (e.g. on votes)
• Steal tokens from node
• Prevent node from accessing the network
• Abuse bugs in the economic system to defraud other participants (e.g. avoid transaction fees to full nodes)
• DDOS attack
• Chain halt and shutting down the network

At this point, for the more technically savvy people, it does worth mentioning that in rabbitmq and GO programming language there are some vulnerabilities identified in certain versions, more specifically for GO[6]:

• Go before 1.12.10 and 1.13.x before 1.13.1 allow HTTP Request Smuggling. - Medium
• The crypto/x509 package of Go before 1.10.6 and 1.11.x before 1.11.3 does not limit the amount of work performed for each chain verification, which might allow attackers to craft pathological inputs leading to a https://blog.bluzelle.com/layer-2-leader-matic-network-partners-with-bluzelle-to-provide-decentralized-data-storage-to-dapps-e9099011b1fbCPU denial of service. Go TLS servers accepting client certificates and TLS clients are affected. - High
• In Go before 1.10.6 and 1.11.x before 1.11.3, the "go get" command is vulnerable to remote code execution when executed with the -u flag and the import path of a malicious Go package, or a package that imports it directly or indirectly. - Critical

For rabbitmq [7]:

• Pivotal Spring AMQP, 1.x versions prior to 1.7.10 and 2.x versions prior to 2.0.6, expose a man-in-the-middle vulnerability due to lack of hostname validation.  - Medium
• An issue was discovered in Pivotal RabbitMQ 3.x before 3.5.8 and 3.6.x before 3.6.6 and RabbitMQ for PCF 1.5.x before 1.5.20, 1.6.x before 1.6.12, and 1.7.x before 1.7.7. MQTT (MQ Telemetry Transport) connection authentication with a username/password pair succeeds if an existing username is provided but the password is omitted from the connection request. Connections that use TLS with a client-provided certificate are not affected.  - Medium
• CRLF injection vulnerability in the management plugin in RabbitMQ 2.1.0 through 3.4.x before 3.4.1 allows remote attackers to inject arbitrary HTTP headers and conduct HTTP response splitting attacks via the download parameter to api/definitions.  - Medium
• Cross-site scripting (XSS) vulnerability in the management plugin in RabbitMQ 2.1.0 through 3.4.x before 3.4.1 allows remote attackers to inject arbitrary web script or HTML via the path info to api/, which is not properly handled in an error message.  - Medium
• RabbitMQ before 3.4.0 allows remote attackers to bypass the loopback_users restriction via a crafted X-Forwareded-For header.  - Medium

Conclusion

Finally after all this analysis the time has come to say my opinion on what is the verdict outcome. Below you can see the pros and cons based on the information collected:

PROS:

Here are my pros about Matic Network:

• As far as their business/social presence is concerned from me gets an 9 out of 10. Well designed site, clear businesses goals, strong community, good partnerships. 
• As far our their technology is concerned from me gets a 7 out of 10. Well documented technology good technologies adopted, easy to install software.
• As far as the token economics is concerned I will give it a 7 out of 10. The coin inflation is good.
• As far as the product information security posture is concerned, Matic Network demonstrates a healthy attitude, by participating in a well known bug bounty program. The code is publicly available and can be reviewed by anyone.
• Very well designed stacking mechanism and decent reward systems, this is a 9 out of 10 staking technology.

CONS:

Here are my cons about Matic Network:

• As far as their business goals are concerned Matic Network is entering multiple high competitive markets such as payments, gaming and DEX(s), instead of focusing in only one or similar markets (e.g. DEX(s) and payments).
• Utilizing the Matic Network token for payments, makes it not good as a value for storage asset (e.g. using it as a currency for retail usage, suppresses the token value).    
• The Matic Network wallet does not have a good rating in Google Play and it has not been updated since 2019.
• The technologies adapted from Matic Network, such as Go programming language, is relatively new and immature. This will later on translate to multiple functional and security bugs.       

Total score is: 8 out of 10 for long term investment and a 7 out of 10 for short term.

References:

• https://matic.network/ [1]
• https://academy.ivanontech.com/blog/defi-deep-dive-what-is-matic-network [2]
• https://cryptorank.io/ico/matic-network [3]
• https://etherscan.io/token/0x7D1AfA7B718fb893dB30A3aBc0Cfc608AaCfeBB0 [4]
• https://decryptionary.com/dictionary/hard-cap/#:~:text=Hard%20cap%20is%20defined%20as,selling%20them%20directly%20to%20people.[5]
• https://www.cvedetails.com/vulnerability-list/vendor_id-14185/product_id-29205/version_id-280800/Golang-GO-1.11.0.html [6]
• https://www.cvedetails.com/vulnerability-list/vendor_id-15183/product_id-30922/version_id-179125/Pivotal-Software-Rabbitmq-3.3.5.html [7]
• https://hackerone.com/matic-network/?type=team [8]
• https://www.globenewswire.com/news-release/2020/07/29/2069530/0/en/Blockchain-Foundry-and-Matic-Network-Establish-Partnership-to-Research-Blockchain-Interoperability.html [9]
• https://blog.matic.network/matic-partners-with-ankr-network/ [10]
• https://blog.bluzelle.com/layer-2-leader-matic-network-partners-with-bluzelle-to-provide-decentralized-data-storage-to-dapps-e9099011b1fb [11]
• https://medium.com/razor-network/razor-network-partners-with-matic-network-af6521b6771f [12]
• https://medium.com/powerpool/powerpool-x-matic-network-partnership-cf52b7301cae [13]
• https://www.meter.io/meter-matic-partnership/ [14]
• https://www.ledgerinsights.com/india-blockchain-accelerator-partners-matic-harmony-aeternity/ [15]
• https://www.crowdfundinsider.com/2020/10/167986-defi-protocol-mantra-dao-partners-matic-network-an-ethereum-layer-2-blockchain-scalability-solution-provider/ [16]
• https://en.wikipedia.org/wiki/Go_(programming_language) [17]
• https://www.stakingrewards.com/earn/matic-network?fbclid=IwAR0WSyOR9IEXwq9_X7HujeAE8yMwu3emYKmPCvxPF5Ooq9upxisQi3ogvnM [18]
• https://blog.matic.network/staking-on-matic-network-mainnet-is-now-live-how-to-delegate-matic/ [19]

Crypto Currency Correlation Analysis (Part 2)

 Introduction 

In this article we are going to correlate multiple cryptocurrencies to see how tokens behave. Below we can see a correlation from 2020-10-16 to 2020-11-10:

Pearson Correlation

Kendall Correlation

Spearman Correlation

Positive correlation groups with BTC to invest/trade together

The group tokens that correlates 0.61 and up in Pearson Correlation is:

• ETH, LINK and LTC

The group tokens that correlates 0.32 and up in Kendall Correlation is:

• ETH, LINK, LTC and XRP

The group tokens that correlates 0.7 and up in Spearman Correlation is:

• ETH, LINK, LTC and XRP

Tokens properties/description:

• Litecoin (LTC) is a decentralized peer-to-peer cryptocurrency that was released on October 7th, 2011 and went live on October 13th, 2011. It's similar to Bitcoin but with more coins in circulation, shorter verification period, and different hashing algorithm.

• XRP is not centralized, Treacher commented, matter-of-factly. “It's a decentralized, open-source digital asset, and the XRP Ledger is based on an inherently decentralized, democratic, consensus mechanism — meaning no one party can control it, not even Ripple.

• Ethereum was proposed in late 2013 by Vitalik Buterin, a cryptocurrency researcher and programmer. Development was funded by an online crowdsale that took place between July and August 2014. In theory Ethereum provides a decentralized replicated virtual machine, called the Ethereum Virtual Machine (EVM), which can execute scripts using an international network of public nodes. But in reality it is not decentralised, it is actually a hybrid.

Note: The market behavior (the psychological perception of the traders and investors) is that ETH and XRP are alike and BTC and LTC are also alike. This correct of false concept makes them behave in such a way so as to consider them "kind of equal".

Negative correlation groups with BTC to invest/trade together

The group tokens that correlates 0.43 to -0.49 in Pearson Correlation is:

• COMP, UNI, SNX and XTZ

The group tokens that correlates -0.28 and down in Kendall Correlation is:

• COMP, UNI, SNX and XTZ

The group tokens that correlates -0.23 and down in Spearman Correlation is:

• COMP, UNI, SNX and XTZ

Tokens properties/description:

• The Compound Protocol is an Ethereum smart contract for supplying or borrowing assets. Through the cToken contracts, accounts on the blockchain supply capital (Ether or ERC-20 tokens) to receive cTokens or borrow assets from the protocol (holding other assets as collateral). The Compound cToken contracts track these balances and algorithmically set interest rates for borrowers.

• Uniswap is a decentralized exchange (DEX). It allows users to swap various Ethereum-based ERC-20 tokens from a simple web interface.

• SNX is a cryptocurrency that powers the Synthetix protocol. Synthetix protocol enables trading synthetic assets on Ethereum. Synths are tokens that provide exposure to assets such as gold, Bitcoin, U.S. Dollars, TESLA, and AAPL within the Ethereum blockchain.

At this point is a good idea to explain what DeFi is. DeFi is short for “decentralized finance,” an umbrella term for a variety of financial applications in cryptocurrency or blockchain geared toward disrupting financial intermediaries. DeFi is distinct because it expands the use of blockchain from simple value transfer to more complex financial use cases. All three tokens are designed to provide complex decentralised services. One would expect that if COMP is running on ETH to correlate well. So we can conclude that the token properties pushes the traders/investors to associate psychologically the tokens together and group them. This might also related to the fundamental analysis too.

                                            

References:

• https://en.wikipedia.org/wiki/Ethereum 
• https://www.financemagnates.com/cryptocurrency/interview/xrp-is-not-centralized-ripple-svp-addresses-crypto-community-criticism/#:~:text=%E2%80%9CXRP%20is%20not%20centralized%2C%E2%80%9D,it%2C%20not%20even%20Ripple.%E2%80%9D
• https://coincentral.com/what-is-litecoin/#:~:text=Litecoin%20(LTC)%20is%20a%20decentralized,period%2C%20and%20different%20hashing%20algorithm.
• https://github.com/compound-finance/compound-protocol
• https://cryptobriefing.com/what-is-uniswap-introduction-uni-token/#:~:text=Key%20Takeaways,token%20for%20its%20governance%20model.

Crypto Currency Correlation Analysis (Part 1)

 Introduction

The importance of the blockchain portfolio diversification due to high volatility is important. Analysing cryptocurrencies can only br done properly using heavy statistical models so as to be as much as possible in the safe side. In order to achieve that I will demonstrate how BTC, ETH, XRP and COMP correlate using three different methods (Pearson, Kendall and Spearman) in three different time periods. A long term time period (e.g. since 2015), a medium length period (one year) and short term period (14 days). But first lets talk about the methods that are going to be used.

Pearson Correlation Coefficient

In statistics, the Pearson correlation coefficient (PCC), also referred to as Pearson's r, the Pearson product-moment correlation coefficient (PPMCC), or the bivariate correlation, is a statistic that measures linear correlation between two variables X and Y. It has a value between +1 and −1. A value of +1 is total positive linear correlation, 0 is no linear correlation, and −1 is total negative linear correlation.

A value of 1 implies that a linear equation describes the relationship between X and Y perfectly, with all data points lying on a line for which Y increases as X increases. A value of −1 implies that all data points lie on a line for which Y decreases as X increases. A value of 0 implies that there is no linear correlation between the variables.[1]

Kendall rank correlation coefficient

In statistics, the Kendall rank correlation coefficient, commonly referred to as Kendall's τ coefficient, is a statistic used to measure the ordinal association between two measured quantities. A τ test is a non-parametric hypothesis test for statistical dependence based on the τ coefficient. [2] The numbers which give us the exact position of an object are called ordinal numbers. 

Ordinal numbers tell the position of an object rather than their quantity. Intuitively, the Kendall correlation between two variables will be high when observations have a similar (or identical for a correlation of 1) rank (i.e. relative position label of the observations within the variable: 1st, 2nd, 3rd, etc.) between the two variables, and low when observations have a dissimilar (or fully different for a correlation of −1) rank between the two variables.

The Kendall rank coefficient is often used as a test statistic in a statistical hypothesis test to establish whether two variables may be regarded as statistically dependent. This test is non-parametric, as it does not rely on any assumptions on the distributions of X or Y or the distribution of (X,Y).

Spearman's Rank Correlation Coefficient

In statistics, Spearman's rank correlation coefficient, is a nonparametric measure of rank correlation (statistical dependence between the rankings of two variables). It assesses how well the relationship between two variables can be described using a monotonic function.

The Spearman correlation between two variables is equal to the Pearson correlation between the rank values of those two variables; while Pearson's correlation assesses linear relationships, Spearman's correlation assesses monotonic relationships (whether linear or not). If there are no repeated data values, a perfect Spearman correlation of +1 or −1 occurs when each of the variables is a perfect monotone function of the other.[3]

A monotonic relationship is a relationship that does one of the following:

• As the value of one variable increases, so does the value of the other variable; or 
• As the value of one variable increases, the other variable value decreases.

Intuitively, the Spearman correlation between two variables will be high when observations have a similar (or identical for a correlation of 1) rank (i.e. relative position label of the observations within the variable: 1st, 2nd, 3rd, etc.) between the two variables, and low when observations have a dissimilar (or fully opposed for a correlation of −1) rank between the two variables.[3]

The Analysis

As already stated we are going to analyse BTC, ETH, XRP and COMP. After that I am going to talk about the coin properties and attempt to identify the associations, between each coin. At this point it is wise to state that the different coin properties add different psychological preferences for both institutional and retail investors e.g. the investors assume based on the currency properties etc.

So here we go 

Pearson Correlation: Time Period 2015 -01-01 to 2020-10-31

Kendall Correlation: Time Period 2015 -01-01 to 2020-10-31

Spearman Correlation: Time Period 2015 -01-01 to 2020-10-31

As we can see from the tables above, using different approaches to statistically analyse coin relationship gives us different results. The one that is the most obvious is the XRP with the BTC. Even though ETH and XRP correlate 90%+ , XRP and BTC do not correlate very in the Spearman analysis, but do well with Kendall and Pearson.  

Pearson Correlation: Time Period 2019 -01-01 to 2020-10-31

Kendall Correlation: Time Period 2019 -01-01 to 2020-10-31

Spearman Correlation: Time Period 2019 -01-01 to 2020-10-31

At this point we can see that XRP is clearly slowly decoupling from BTC and ETH is becoming even more closely associated to BTC. At this point we have to understand that the volume of the transactions is dramatically increased. See below [4]:

Average number of daily cryptocurrency transactions in 2nd quarter of 2020

Pearson Correlation: Time Period 2020 -10-16 to 2020-10-31

Kendall Correlation: Time Period 2020 -10-16 to 2020-10-31

Spearman Correlation: Time Period 2020 -10-16 to 2020-10-31

It seems that there is a variation between the relationship of the coins. You comments please below.....

Coin Properties

XRP properties:

• RippleNet is a network of institutional payment-providers such as banks and money services businesses that use solutions developed by Ripple to provide a frictionless experience to send money globally.
• Unlike Bitcoin or Ethereum, Ripple doesn’t have a blockchain aka is centralised. Ripple has is own patented technology: the Ripple protocol consensus algorithm (RPCA).

ETH properties:

• ETH is using a blockchain.
• Mining through proof of work (soon to change)
• Ethereum is a decentralized system
• Was build to support contracts

Ethereum and Bitcoin might be somehow similar when it comes to the cryptocurrency aspect, but the reality is that they are two completely different projects with completely different goals. While Bitcoin has established itself as a relatively stable and the most successful cryptocurrency to date, Ethereum is a multipurpose platform with its digital currency Ether being just a component of its smart contract applications.[5]

BTC properties:

• BTC is using a blockchain.
• Mining through proof of work
• BTC is a decentralized system
• BTC is a money-transfer system

Of Bitcoin’s many properties, trustlessness, or the ability to use Bitcoin without trusting anything but the open-source software you run, is, by far, king. More specifically, interest in Bitcoin appears to almost exclusively derive from a desire to avoid needing to trust some third party or combination of third parties. 

COMP Properties:

• Runs on top of ETH platform
• Compound Protocol is a suite of Ethereum smart contracts
• In order to supply or borrow assets from the protocol, you need to write to the Ethereum blockchain.

Someone would expect that COMP should correlate perfectly with ETH, but nop......

For the people that want to reproduce the analysis, can use Python jypeter notebook, simply pull the data from an exchange API and use the following code:

corrMatrix = ALL_COIN_PRICE_MATRIX.corr(method ='spearman')

sns.heatmap(corrMatrix, annot=True)

plt.show()

corrMatrix = ALL_COIN_PRICE_MATRIX.corr(method ='kendall')

sns.heatmap(corrMatrix, annot=True)

plt.show()

corrMatrix = ALL_COIN_PRICE_MATRIX.corr(method ='pearson')

sns.heatmap(corrMatrix, annot=True)

plt.show()

References

• https://en.wikipedia.org/wiki/Pearson_correlation_coefficient [1]
• https://en.wikipedia.org/wiki/Kendall_rank_correlation_coefficient [2]
• https://en.wikipedia.org/wiki/Spearman%27s_rank_correlation_coefficient [3]
• https://www.statista.com/statistics/730838/number-of-daily-cryptocurrency-transactions-by-type/#:~:text=Number%20of%20daily%20cryptocurrency%20transactions%202020%2C%20by%20type&text=In%20the%20second%20quarter%20of,daily%20transactions%20in%20that%20quarter. [4]
• https://cointelegraph.com/ethereum-for-beginners/what-is-ethereum [5]
• https://nakamoto.com/what-are-the-key-properties-of-bitcoin/ [6]