A recent report by leading cryptocurrency exchange Binance that explored the correlation among various kinds of cryptocurrency and their clusters, has declared XRP as the ‘best diversifying digital asset.’ For the uninitiated, a diversifying asset provides an alternative investment opportunity to the investors.
What are Clusters?
Currently, the market boasts of several cryptocurrencies that based on similar market trends tend to exhibit positive correlations also known as clusters. The largest of the clusters today is comprised of Bitcoin, Bitcoin Cash, Ethereum, Bitcoin Gold and Litecoin. As these cryptocurrencies are all part of one cluster, they tend to show similar price movements and therefore, bring in similar gains and losses for the investors.
XRP: Best Investment Alternative or Not?
Ripple’s XRP is the largest cryptocurrency at the moment with a $3 billion market cap that is not part of this cluster. Therefore, the report hails it as the best diversifier.
However, the report quickly points out that a diversifier does not necessarily entail risk-free investment. In fact, historical market analysis depicts investing in diversifiers as a risky strategy.
Key Aspects of the Binance Study
The report also delved into various factors that govern the formulation of a cluster, like the “Binance Effect” and the “Coinbase Effect.” These effects govern the price action of cryptocurrencies that are both listed as well as not listed on the Binance and Coinbase exchanges. The most popular examples are Tezos and Dogecoin both of which are exempted from Binance. These cryptos are not part of any large clusters but have formed their separate “child” clusters.
For the purpose of their year-long study from 31 March 2018 to 31 March 2019, Binance took 30 cryptocurrencies at the top of the list on CoinMarketCap and their equivalent prices in USD. Moreover, the research exempted stablecoins and other “backed” digital assets. In the end, the report refrains from drawing definite conclusions and notes the increase in crypto correlation since the release of their last report instead.