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.