A Bitcoin crash is likely to derail other cryptocurrencies, according to new research. However, more traditional markets would be relatively insulated from severe devaluation.
The new study from Anglia Ruskin University in the UK shows how it is possible that a sudden drop in the value of Bitcoin will blow up other cryptocurrencies. Nevertheless, it is doubtful that the cumulative effect would have a lasting impact on conventional firms.
In the study, the researchers looked at the recent performance of three established cryptocurrencies: Bitcoin, Litecoin, and Ripple. In doing so, the researchers assessed the relationship of these cryptocurrencies to a variety of other financial assets, including gold, bonds, and stocks.
This analysis showed that Bitcoin price changes affect Ripple, with a spillover of 28.37%. Bitcoin similarly affects Litecoin (42.3 percent). In terms of other assets, the biggest spillover from a cryptocurrency to a traditional asset was Bitcoin to Forex (the foreign exchange market for currency trading), which was at 15.25%.
Ripple and Litecoin have very little Bitcoin control here. This means that the biggest pioneer in the market for cryptocurrencies is Bitcoin. Based on the analysis, the researchers conclude that the findings show that cryptocurrencies can offer diversification benefits to investors with short investment horizons.
On this point, lead researcher Larisa Yarovaya says: "Our findings support the position that cryptocurrencies are a new investment class and play a role in an investor portfolio, being highly connected but disconnected from core assets."
The research was published in the journal Economics Letters, in a paper titled “Exploring the dynamic relationships between cryptocurrencies and other financial assets”. Provided, that is, investors accept the idiosyncratic risks that come with digital currencies.
Another study, from the University of Edinburgh, noticed in the Bitcoin-related news that the devices used to administer Bitcoin accounts need to be strengthened in order to have stronger security against hackers. With this analysis, computer scientists found many security flaws in gadgets used to use Bitcoin to handle personal accounts.
This was demonstrated through a practical experiment. Here the researchers created a simple malware. This malicious code was able to intercept messages sent between hardware wallets and computers - locations where users manage their Bitcoin accounts. Based on this, the researchers recommend that more stringent security protocols be put in place.