Bitcoin crash could derail other cryptocurrencies

February 8, 2018, Anglia Ruskin University
Credit: CC0 Public Domain

A sharp fall in the value of Bitcoin may cause other cryptocurrencies to crash, but is unlikely to have a significant impact on traditional assets, according to new research published in the journal Economics Letters.

Researchers from Anglia Ruskin University, Dublin City University and Trinity College Dublin examined the performance of three established cryptocurrencies - Bitcoin, Litecoin and Ripple - and analysed their relationship with a variety of other such as gold, bonds and stocks.

The study found that Bitcoin affect Ripple, with a spillover of 28.37%, and Litecoin (42.3%), while the highest spillover from a cryptocurrency to a "traditional" asset was Bitcoin to Forex (FX), at 15.25%. In reverse, the highest price spillover from traditional assets to a cryptocurrency - Forex (FX) to Bitcoin - is only 4.18%.

The study also found that the volatility of cryptocurrencies is significantly higher than that of other assets, and that Ripple and Litecoin have limited influence on Bitcoin, proving that Bitcoin is the clear leader in the cryptocurrency market. The research also suggests that Ripple and Litecoin have seen their values increased thanks to the rapid growth of Bitcoin.

Co-author Dr Larisa Yarovaya, Lecturer in Accounting and Finance at Anglia Ruskin University, said: "We identified that cryptocurrencies are relatively isolated from other financial assets, but are interlinked with each other.

"This means a decrease in the price of Bitcoin is unlikely to decrease the price of gold, or negatively affect the stock market of US, but the strong links between Bitcoin and other cryptocurrencies mean that those markets will fall.

"Our results support the position that are a new investment asset class and have a role in an investor portfolio, being highly connected to each other but disconnected from mainstream assets. However, they also contain their own idiosyncratic risks that are difficult to hedge against."

Explore further: Cryptocurrencies fall after Japan's Coincheck halts withdrawals

Related Stories

Bitcoin does not dominate the cryptocurrency market: study

November 16, 2017

The first complete study of the entire cryptocurrency market between 2013 and 2017 has concluded that no cryptocurrency has shown a strong selective advantage over the other and that all cryptocurrencies face an uncertain ...

Central banker takes stab at bitcoin 'bubble'

February 6, 2018

The head of the Bank of International Settlements, the central bank for central banks, on Tuesday lambasted bitcoin as a speculative bubble and said authorities need to be ready to protect public trust in the financial system.

Recommended for you

Why war is a man's game

August 15, 2018

No sex differences in attitudes or abilities are needed to explain the near absence of women from the battlefield in ancient societies and throughout history, it could ultimately all be down to chance, say researchers at ...

0 comments

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.