Study: Bitcoin Crash Could Sink Entire Cryptocurrency Market, But Traditional Assets Not Affected
DUBLIN — As investors continue to hold their breaths amid Bitcoin’s recent dramatic spikes and tumbles, those who opt to invest in other digital currency should still pay close attention. A new study finds a Bitcoin crash could spell doom for other popular cryptocurrencies, while traditional assets would likely go unharmed.
Researchers from universities in England and Ireland examined the performance of three popular cryptocurrencies — Bitcoin, Litecoin, and Ripple — and analyzed their fiscal relationship to each other and other common financial assets such as gold, stocks, and bonds.
The study also found that cryptocurrencies are significantly more volatile than other financial assets, and that Ripple and Litecoin have little impact on the value of Bitcoin, the unquestioned king of the cryptocurrency jungle. Instead, researchers say that Ripple and Litecoin have risen in value as a result of Bitcoin’s success.
“Our results support the position that cryptocurrencies 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,” explains Dr. Larisa Yarovaya, a lecturer in accounting and finance at Anglia Ruskin University, in a news release.
Researchers showed that Bitcoin prices directly affected Ripple and Litecoin, with spillover rates at 28.37% and 42.3%, respectively. The highest spillover from a cryptocurrency to a traditional financial asset was Bitcoin to Forex, at 15.25%. In reverse, the spillover from Forex to Bitcoin was only 4.18%.
“We identified that cryptocurrencies are relatively isolated from other financial assets, but are interlinked with each other,” says Yarovaya. “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.”
The study is published in the April 2018 edition of the journal Economic Letters.
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