Goldman Sachs says crypto market correlation is a worry

Anthony Caruana 7 February 2018
"Hey, you jump when I jump." Picture: Aspen Photo/Shutterstock

"Hey, you jump when I jump." Picture: Aspen Photo/Shutterstock

"Contrary to what one would expect in a rational market."

A Goldman Sachs analyst has expressed concern over the tendency for the cryptocurrency market to move in sync, suggesting that means that the sector is very far from mature.

In a note to clients this week, head of global investment research Steve Strongin said:

The high correlation between the different crypto currencies worries me. Contrary to what one would expect in a rational market, new currencies don't seem to reduce the value of old currencies; they all seem to move as a single asset class.

Looking at Cryptowatch, we're seeing the same pattern emerge. Although some coins move with greater volatility, bitcoin, Ethereum, Ripple and Cardano, for example, all have very similar price fluctuations – they rise and fall together.

With regulators in the US suggesting cryptocurrencies are going to be "bigger than The Beatles", such patterns are worth tracking. However, as all markets launch, following the initial period of massive expansion – which we're seeing as new coins are launched in areas as diverse as energy, gambling and adult entertainment – there will be casualties as others lose value, such as Monero Gold.

Strongin says the loss of a cryptocurrency is quite different to the decommissioning of fiat currencies. When a cryptocurrency fades from the market, the holders are left with nothing of value, much like US citizens left with Confederate Bonds after the Civil War. But when a fiat currency is phased out, it is assigned a residual value so the old currency can be exchanged for a new one.

With cryptocurrencies still a relatively new financial tool there are a lot of traders coming in. And, for many, bitcoin remains the barometer of the coin market as it's the most well-known. Given that markets are occupied and managed by humans, it's unsurprising to see the herd move together. When bitcoin's price moves, others follow suit. In time, we should expect to see those correlations fade as the market matures and the differences in how currencies are created, traded and used become less opaque.

Goldman Sachs remains optimistic on the future of cryptocurrencies but says the underlying technology blockchain, is the most important element.

"As it relates to the underlying technology, there is clearly a role for improving the ledgers that underlie financial transactions," Strogin wrote. "Substantial investment is being made in leveraging blockchain technology to more efficiently and quickly settle contracts, confirmations, and related transactions".

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