ECONOMIC PAPERS, VOL. 39, NO.

2, JUNE 2020, 118–132

Special Section: Economics of Blockchain Technology

One Cryptocurrency to Explain Them All?

Understanding the Importance of Bitcoin in
Cryptocurrency Returns
Lee Alan Smales

We utilise principal component analysis to determine whether a (small) set

of factors can explain cryptocurrency returns and whether this varies over
time. We find that a substantial proportion of cryptocurrency return varia-
tion is explained by a single principal component that is highly correlated
with bitcoin returns. The explanatory power of this factor is greatest for lar-
ger cryptocurrencies and increases markedly in the most recent part of the
sample. Our results have implications for investors determining optimal port-
folio decisions and for policy-makers wary of systemic risk.
Keywords: cryptocurrency, bitcoin, principal component analysis, time-
varying.

1. Introduction
The first blockchain was implemented by Satoshi Nakamoto in 2008, serving as the public ledger for
bitcoin transactions. In the ensuing period, cryptocurrencies have received substantial attention from
investors, regulators and the media. This is despite the ongoing debate as to the correct designation of
cryptocurrencies, with many countries yet to determine legal status. With bitcoin, and cryptocurren-
cies in general, failing to fulfil any of the criteria required to be a currency (Yermack, 2013), the con-
sensus seems to be moving towards use as a speculative investment (e.g. Yermack, 2013; Baur et al.,
2018). Elendner et al. (2018) suggest that the development of a wide range of alternative coins, with
idiosyncratic properties, makes it important to consider the ramifications for portfolio choice and
diversification.
The earliest studies in this nascent field suggested the presence of inefficiency (Urquhart, 2016)
and predictable patterns (Phillip et al., 2018) in cryptocurrency markets. More recently, market matu-
ration has led to greater efficiency (Vidal-Tomas & Ibanez, 2018; Grobys & Sapkota, 2019) that is at
least partly driven by liquidity (Wei, 2018; Kochling et al., 2019) and size (Brauneis & Mestel, 2018).
The literature has also offered evidence that cryptocurrency returns are uncorrelated with traditional
asset classes (Baur et al., 2018; Corbet et al., 2018) and potentially offer attractive diversification

UWA Business School, University of Western Australia Perth, WA, Australia.

JEL classifications: C38, E49, G10, G19
Correspondence: L.A. Smales, UWA Business School, University of Western Australia, Stirling Highway, Perth,
WA 6009, Australia. Email: lee.smales@uwa.edu.au
Accepted date: March 16, 2020

118
Ó 2020 The Economic Society of Australia
doi: 10.1111/1759-3441.12282
2020 ONE CRYPTOCURRENCY TO EXPLAIN THEM ALL? 119

benefits (e.g. Dyherberg, 2016; Bouri et al., 2017; Baur et al., 2018; Guesmi et al., 2019; Bouri et al.,
2019b).
However, cryptocurrency prices are highly volatile (Dwyer, 2015; Chaim & Laurini, 2018; Smales,
2019), with clustering (Urquhart, 2017; Phillip et al., 2018), and are prone to both price jumps
(Chaim & Laurini, 2018; Bouri et al., 2019d) and speculative bubbles (Cheah & Fry, 2015). There is
evidence that returns, but not return volatility, are related to changes in trading volume in a non-lin-
ear manner (Balcilar et al., 2017; El Alaoui et al., 2019; Bouri et al., 2019a). Baur and Dimpfl (2018)
find that the “fear of missing out” creates an unusual volatility asymmetry whereby volatility
increases more following positive price shocks. Bernsten and Schar (2018) suggest that cryptocurren-
cies are prone to volatile short-term price fluctuations owing to decentralisation and a relatively fixed
supply.
Several papers have examined the interconnectedness of cryptocurrency returns and volatility, the
main area of our focus. Bouri et al. (2019d) show that bitcoin and over cryptocurrencies experience
jumps in returns and trading volume together. Shams (2019) suggests their unique features amplify
the high level of interdependence among cryptocurrencies, along with exposure to similar demand
shocks and network externalities. Balcilar et al. (2017) suggest it is due to ease of information trans-
mission resulting from the open nature of the system. The empirical evidence supports this and
demonstrates that interdependence has increased over time (e.g. Koutmos, 2018; Antonakakis et al.,
2019; Ji et al., 2019). However, there is some debate as to whether connectedness is stronger when
returns are positive (Ji et al., 2019) or negative (Antonakakis, et al., 2019).
More recently, the literature has applied asset-pricing techniques to cryptocurrencies in an attempt
to identify factors that explain excess returns. The most successful appear to be crypto-specific factors
such as investor attention, size and momentum (Liu & Tsyvinski, 2018; Borri & Shakhnov, 2019; Liu
et al., 2019). We contribute to this area of the literature by investigating the drivers of cryptocurrency
returns. Essentially, we ask whether a (small) set of factors can explain cryptocurrency returns, and
whether this varies over time. As the literature has demonstrated the important role of bitcoin in
determining interdependence across cryptocurrency markets (e.g. Balcilar et al., 2017; Koutmos,
2018; Ji et al., 2019), we then examine whether this set of factors is related to bitcoin returns.
While our paper supplements the studies on cryptocurrency interconnectedness of Koutmos
(2018), Antonakakis et al. (2019) and Ji et al. (2019), it is most related to the work of Liew et al.
(2019). They find that the number of factors necessary to explain returns increases over time, as the
proportion of variance explained by the first principal component declines substantially. By incorpo-
rating the 40 largest cryptocurrencies in our study,1 we also add to the understanding of size-based
effects in crypto markets. This is increasingly important since aggregate market value has recently
resulted from a higher frequency of smaller cryptocurrencies (Elendner et al., 2018).
Eschewing complex econometric modelling, we attempt to answer our research question by utilis-
ing a relatively simple combination of principal component analysis and correlation analysis to
answer our research question. This has the advantage of easy implementation and interpretation.
Our results indicate that a substantial proportion of cryptocurrency return variation is explained by
the first principal component. The explanatory power is greatest for the largest cryptocurrencies and
increases markedly in the latter half of the sample. The proportion of variance explained by this factor
appears larger and more persistent than suggested by Liew et al. (2019) but is somewhat consistent
with the total connectedness index of Antonakakis et al. (2019). This first principal component is
highly correlated with bitcoin returns, suggesting that bitcoin is a key driver of returns across cryp-
tocurrencies. Both this correlation and the correlation between bitcoin returns and those of other
cryptocurrencies increase over time. However, the results are more nuanced than that previously
reported. For instance, in earlier periods (2015–2016), when price changes are less dramatic, the cor-
relation tends to fall as prices rise (consistent with Ji et al., 2019). However, in more recent times

1
Aside from Wei (2018) with 450 currencies and Liew et al. (2019) with 100, the literature has generally focused
on just 6–12 cryptocurrencies (e.g. Antonakakis et al., 2019; Bouri et al., 2019a,c,d; Ji et al., 2019).

Ó 2020 The Economic Society of Australia

120 ECONOMIC PAPERS JUNE

Table 1. Descriptive Statistics

Mean SD Min. Max. Skewness Kurtosis Mkt. Cap. ($MM)

All 0.014 8.181
40.521 59.547 0.936 15.249 1625.43

BTC 0.129 4.414
20.753 22.512 0.048 6.481 211,712.39
Q1 0.111 7.361
34.804 45.537 0.655 9.987 5868.63
Q2 0.060 7.829
34.764 47.407 0.684 10.825 298.95
Q3
0.089 8.861
42.998 69.241 1.362 17.839 115.68
Q4
0.120 9.139
48.580 74.314 0.938 19.013 67.47

Note: This table contains descriptive statistics for the daily returns for the set of 41 cryptocurrencies used in this study. Q1, Q2, Q3
and Q4 each represent a portfolio of 10 cryptocurrencies sorted on size, with Q1 the largest quartile. Bitcoin (BTC) is shown sepa-
rately. Market capitalisation is computed as at 05 August 2019.
Sample Period: April 2013–August 2019
Source: https://coinmarketcap.com

(2017 onwards), the correlation tends to fall along with bitcoin prices, which is instead consistent
with Antonakakis et al. (2019).
Our results matter for investors determining optimal portfolio decisions, and to policy-makers wary
of systemic risk. For instance, the interdependence among cryptocurrencies may reduce the benefits
of diversification and lead to greater levels of contagion risk, or systemic “crypto” risk. This is particu-
larly important given the apparent importance of a single cryptocurrency, bitcoin, in determining a
broad spectrum of prices. Especially when bitcoin returns are prone to “sudden, massive, price
swings” (Chaim & Laurini, 2018), and there is media discussion regarding the excess influence of a
few, large traders.2

2. Data
We focus our analysis on the 100 largest cryptocurrencies by market capitalisation as at 01 August
2019. We remove “stablecoins” directly linked to USD (since they exhibit idiosyncratic return pat-
terns), and bitcoin “forks”3 (Bitcoin Cash, Bitcoin SV, Bitcoin ABC) that are likely to bias our esti-
mates. Finally, we remove coins with <1 year of return data,4 leaving a sample of cryptocurrencies
consisting of bitcoin plus 40 additional “altcoins.”
We obtain data from coinmarketcap.com for the period 28 April 2013–05 August 2019, where the
daily closing price is taken at 23:59 UTC (cryptocurrencies trade 24/7) and prices are calculated as an
average across different exchanges. We create a series of 2,200 daily returns using closing prices:
Rt = 100 9 ln(Pt/Pt
1), where all return series are stationary. Table 1 provides descriptive statistics for
the sample with the 40 altcoins sorted into four portfolios based on market capitalisation. Bitcoin was
the first cryptocurrency and, despite the emergence of thousands of competing altcoins, it still
accounts for approximately 70% of total market capitalisation. Figure 1 illustrates the evolution of
bitcoin prices and market capitalisation.
Table 1 shows that cryptocurrency returns are highly volatile, exhibiting positive skewness and
“fat-tails.” Average returns decline, and return variation increases, as the market capitalisation of the
cryptocurrency falls. This is consistent with the identification of greater variability among currencies
with lower market capitalisation noted by Phillip et al. (2018). Bitcoin has a much larger market capi-
talisation than the average cryptocurrency in our sample (1309), outperforming the alternatives

2
See for instance: https://bitcoinist.com/bitcoin-price-plunge-came-from-1-2b-sell-data-says-amid-hashrate-
row/ and https://www.forbes.com/sites/billybambrough/2019/06/04/bitcoin-plunged-below-8000-did-this-cause-
the-sudden-drop/#2f5d2df34c81
3
Put simply, a “fork” represents a change to the internal protocol of a cryptocurrency.
4
Currently, coinmarketcap.com lists 2,322 cryptocurrencies (coins and tokens) but many are either very new or
have failed shortly after issuance.

Ó 2020 The Economic Society of Australia

2020 ONE CRYPTOCURRENCY TO EXPLAIN THEM ALL? 121

Figure 1. Price and Market Capitalisation of Bitcoin (BTC)

Table 2. Average Cross-Correlation of Cryptocurrency Returns

Q1 Q2 Q3 Q4

BNB 0.401 BAT 0.347 BCN 0.228 AE 0.319

DASH 0.373 DCR 0.436 BTS 0.178 ARDR 0.269
EOS 0.371 DOGE 0.355 DGB 0.354 ETP 0.270
ETC 0.459 LSK 0.352 GXC 0.396 GNT 0.408
ETH 0.390 NANO 0.372 KMD 0.353 MAID 0.386
LTC 0.420 OMG 0.439 LINK 0.317 MCO 0.383
NEO 0.413 QTUM 0.506 MONA 0.281 SNT 0.468
XLM 0.363 WAVES 0.441 REP 0.303 STEEM 0.354
XMR 0.363 XEM 0.369 SC 0.368 XZC 0.321
XRP 0.356 ZEC 0.374 XVG 0.281 ZEN 0.360
Average 0.391 0.399 0.306 0.354

Note: This table displays the average correlation coefficient of each cryptocurrency with all other cryptocurrencies in the sample.
All correlations are statistically significant at the 1% level. The complete correlation matrix is shown in Appendix A. Q1–Q4 signi-
fies the size quartile for each cryptocurrency.
Sample Period: April 2013–August 2019.

(0.129% v 0.014%), with lower variability (4.41$ v 8.18%) and smaller drawdowns. The additional
risk-adjusted return for larger cryptocurrencies runs contrary to that implied by the SMB factor in
stocks (Fama & French, 1992). The descriptive statistics show that the underlying returns across cryp-
tocurrencies are of a similar scale (mean and standard deviation). In addition, returns for all cryp-
tocurrencies are positively correlated with each other on average (Table 25).

5
Table 2 displays the summary of the cross-correlation of cryptocurrency returns and a complete correlation
matrix is provided in the Appendix.

Ó 2020 The Economic Society of Australia

122 ECONOMIC PAPERS JUNE

Table 3. Principal Component Analysis

PC1 PC2 PC3 PC4 PC5 qBTC,PC1 qBTC,PC2 qBTC,PC3

All
Proportion 0.480 0.041 0.030 0.028 0.026 0.767 0.030
0.016
Cum. Proportion 0.521 0.041 0.071 0.099 0.125
Q1
Proportion 0.582 0.075 0.068 0.049 0.042 0.790 0.129
0.012
Cum. Proportion 0.657 0.075 0.142 0.191 0.234
Q2
Proportion 0.593 0.060 0.053 0.048 0.045 0.792 0.038 0.075
Cum. Proportion 0.653 0.060 0.113 0.160 0.205
Q3
Proportion 0.471 0.142 0.095 0.072 0.055 0.779
0.074
0.031
Cum. Proportion 0.613 0.142 0.237 0.310 0.365
Q4
Proportion 0.472 0.082 0.075 0.068 0.064 0.769
0.010
0.063
Cum. Proportion 0.554 0.082 0.157 0.224 0.289
Long
Proportion 0.344 0.144 0.088 0.085 0.071 0.745
0.063 0.063
Cum. Proportion 0.488 0.144 0.232 0.317 0.389

Note: This table presents the principal component analysis for a set of cryptocurrency returns. Q1, Q2, Q3 and Q4 each represent a
set of 10 cryptocurrencies sorted on size, with Q1 the largest quartile. For each set of cryptocurrencies, the proportion of variance
explained by the first five principal components is shown (1st line) together with the cumulative proportion (2nd line). The final
columns shows the correlation of bitcoin (BTC) returns with the first three principal component generated using the given set of
cryptocurrencies. Statistical significance at the 5% level is denoted by italics. The sample period for the cryptocurrencies that are
established for a longer period (LONG) runs from August 2014 to August 2019. The sample period for the remaining portfolios
runs from December 2017 to August 2019.

3. Empirical Analysis
Our empirical study utilises principal component analysis (PCA) to determine the common drivers of
cryptocurrency returns. This dimensionality reduction technique models the variance structure of a
set of observed variables. The principal components (PCs) are obtained via eigenvalue decomposition
of the variance matrix. The first PC is the linear combination of the original variables with maximum
variance, and subsequent PCs are found by maximising variance among linear combinations that are
orthogonal to the prior components6. In other words, the principal components are the eigenvalues
of (X’X) where X is the matrix of cryptocurrency returns and the number of eigenvalues is equal to
the number of variables, k. If the ordered eigenvalues are denoted as ki, then the proportion of the
total variation in the data explained by the ith principal component is obtained via the ratio7:
ki
gi ¼ Pk ð1Þ
i¼1 ki
The issuance date for the cryptocurrencies in our sample varies, and so to avoid filling backward on
missing lead values we first run our analysis for the period running from December 2017 (when all
41 cryptocurrencies are available), and then repeat for the period running from August 2014 (when
bitcoin and 10 of the altcoins are available8). Estimated results for the first five principal components
are shown in Table 3, where PCA is conducted for all cryptocurrency returns in the main sample

6
See Johnson and Wichern (2013) for more detail.
7
Principal components that are not sufficiently useful in explaining variation in the returns may be discarded.
8
The 10 altcoins in this longer sample are BCN, BTS, DASH, DGB, DOGE, MAID, MONA, XLM, XMR, XRP and
XVG.

Ó 2020 The Economic Society of Australia

2020 ONE CRYPTOCURRENCY TO EXPLAIN THEM ALL? 123

Figure 2. Proportion of Variance Explained by Principal Components for (LONG) Portfolio of Cryptocurrencies

(ALL), for each of the size quartiles (Q1, Q2, Q3 and Q4), and finally for the longer sample (LONG).
In all cases, bitcoin (BTC) returns are excluded from the sample to avoid bias.
In all cases, a significant proportion of variance is explained by the first principal component (PC1),
with less variation captured by the remaining PCs. For the overall sample, PC1 explains 48% of varia-
tion9, PC2 a much smaller 4% and PC3 less than 3%. A scree test (plots shown in Appendix B) sug-
gests that retaining one principal component should be sufficient for PCA. The proportion of variance
explained by PC1 declines as we move from Q1 to Q4 (consistent with the crypto size factor of Liu
et al., 2019) which suggests that the fundamental factor underlying PC1 appears to be less informative
for smaller cryptocurrencies.
While the first three PCs appear to explain the same cumulative proportion of variation in the
longer sample (58%), the apportioning differs in the shorter sample period, when a wider range of
cryptocurrencies are available. In particular, PC1 explains only 34% of variation on average in the
longer sample (dating back to August 2014). While more recently, the proportion explained by PC1
has become much more important. Figure 2 shows an average closer to 65% from October 2018,
with the first three PCs now accounting for 85% of variation. This seems to run counter to Liew et al.
(2019) but is consistent with Koutmos (2018) and Ji et al. (2019) who report that return and volatility
spillovers among cryptocurrencies have increased over time.
Figure 3 depicts the similar increase in PC1 importance across all sorted cryptocurrency portfolios.
The greatest increase in variance explained by PC1 occurs for the largest cryptocurrencies, where the
average variance explained by PC1 is above 76% since October 2018. This suggests a greater degree
of interdependence has developed in recent times, consistent with Antonakakis et al. (2019).
One question that arises is why the underlying structure of the return generating process has chan-
ged over time. It is most likely related to maturation of the cryptocurrency market. Urquhart (2016)
suggested that bitcoin was already moving towards an efficient market, while Grobys and Sapkota
(2019) form the opinion that the cryptocurrency market is now far more efficient than previously

9
This differs from the 98% level suggested by Liew et al. (2019) in earlier sample periods but is more consistent
with the close to 50% level they identify for the 2017–2018 period.

Ó 2020 The Economic Society of Australia

124 ECONOMIC PAPERS JUNE

Figure 3. Proportion of Variance Explained by First Principal Component for Size-Sorted Portfolios of Cryptocurrencies
[Colour figure can be viewed at wileyonlinelibrary.com]

thought. This is aided by the increased attention of institutional investors10, the launch of bitcoin
futures11 and greater regulatory surveillance12.
Prior work (e.g. Balcilar et al., 2017; Hu et al., 2018; Koutmos, 2018; Liu & Tsyvinski, 2018; Ji et al.,
2019) has suggested that, given its dominance in terms of market capitalisation and investor atten-
tion, bitcoin returns are a key driver for other cryptocurrencies. If this were true, then we would
expect bitcoin returns to be closely correlated with the identified first principal component (recall that
PCA is conducted with portfolios not containing bitcoin). The final column of Table 3 shows that the
correlation of bitcoin returns with PC1 is more than 76% on average (the average correlation of bit-
coin returns with altcoin returns is 40.1% for the long sample and 50.9% for the shorter sample) and
is greater for the larger cryptocurrencies.
Figure 4 plots the 200-day rolling correlation for bitcoin returns with PC1 across all cryptocurren-
cies and for the size-sorted portfolios. Since 2018, the correlation has generally been above 0.8 and
often close to 1.0. Figure 5 plots the 200-day rolling average correlation between bitcoin returns and
the other cryptocurrencies in our sample. A similar picture emerges, with interdependence rising sub-
stantially during the period since 2018 and reaching a level close to 0.8. This is almost double that
reported in Liew et al. (2019). Earlier in the sample, we find confirmation of the wide variation in
interdependence noted by Antonakakis et al. (2019). Prior research had contested whether the corre-
lation falls as prices decline (Antonakakis et al., 2019) or as prices rise (Ji et al., 2019). Our observation
is that the answer is likely dependent on the sample period, and market conditions during that per-
iod. For instance, we find evidence of an inverse relationship between prices and correlation in the
period when price changes are less dramatic (2015–2016) and a positive relationship in more recent
times as cryptocurrencies gain wider attention and price movements are more acute.
Our empirical analysis has focused on bitcoin as a key driver in explaining general cryptocurrency
returns. As noted, this is consistent with the results of Antonakakis et al. (2019) who note that bitcoin
still has a substantial influence on the cryptocurrency market. However, they also suggest that spil-
lovers from ethereum to other digital currencies have intensified and result in spillover transmission

10
https://www.coindesk.com/rising-institutional-investment-setting-pace-for-future-crypto-growth
11
https://www.cmegroup.com/trading/bitcoin-futures.html
12
https://www.coindesk.com/regulators-begin-to-debate-cryptocurrency-legislation-ahead-of-g20-summit

Ó 2020 The Economic Society of Australia

2020 ONE CRYPTOCURRENCY TO EXPLAIN THEM ALL? 125

Figure 4. Rolling 200-Day Correlation Between BTC Returns and First Principal Component [Colour figure can be viewed
at wileyonlinelibrary.com]

Figure 5. Rolling 200-Day Correlation Between BTC Returns and Other Cryptocurrency Returns

Ó 2020 The Economic Society of Australia

126 ECONOMIC PAPERS JUNE

Table 4. Granger Causality Testing

7 August 7 August 7 August 7 August 7 August 8 May

2015 2015 2015 2016 2017 2018
8 May 2019 31 May 7 August 7 August 7 August 8 May
2018 2016 2017 2018 2019

BTC does not Granger 4.582** 3.666* 9.745*** 0.222 0.757 3.659*
cause PC1
(0.033) (0.056) (0.002) (0.638) (0.385) (0.054)
PC1 does not Granger cause 0.018 0.001 0.065 0.533 0.538 0.600
BTC
(0.894) (0.978) (0.798) (0.466) (0.464) (0.439)
ETH does not Granger 1.468 1.947 15.914*** 0.252 0.892 0.415
cause PC1
(0.226) (0.163) (0.000) (0.652) (0.346) (0.520)
PC1 does not Granger cause 0.223 0.003 0.113 4.298** 0.258 0.449
ETH
(0.637) (0.959) (0.737) (0.039) (0.612) (0.503)
ETH does not Granger 1.613 1.496 0.250 0.726 6.993*** 0.019
cause BTC
(0.204) (0.222) (0.617) (0.395) (0.009) (0.890)
BTC does not Granger 1.407 0.452 0.512 1.914 0.719 0.744
cause ETH
(0.236) (0.501) (0.475) (0.167) (0.397) (0.389)
No. Obs. 1,368 1,026 365 365 365 365

Note: This table presents results for a set of pairwise Granger causality tests for returns on bitcoin (BTC) and ethereum (ETH) in
addition to the first principal component (PC1) for a set of 40 cryptocurrencies. The 1st column is the period running from the
introduction of ethereum (07 August 2015) to the end of our sample period (08 May 2019). The 2nd column is a sample period
that matches that used in Antonakakis et al. (2019). The final 4 columns are 1-year intervals. F-statistics for pairwise causality
between variables are presented, together with p values in parentheses.
***, ** and * indicate statistical significance at the 1%, 5% and 10% level, respectively.

to bitcoin from late 2017. Given our focus on bitcoin, we have not excluded the possibility that ether-
eum plays an equally important role in the cryptocurrency market. We attempt to address this by
testing for Granger causality between bitcoin, ethereum and the first principal component for the
overall market.
The first two columns of Table 4 suggest causality running from BTC to PC1 for the period from
ethereum (ETH) introduction (7th August 2015) to the end of our sample (8th May 2019) and for the
period used by Antonakakis et al. (7th August 2015–31st May 2018). This is consistent with BTC act-
ing as a net transmitter of spillovers throughout the sample period. In contrast, no evidence of causal-
ity for ETH is found for the overall sample. We then consider 1-year sub-samples and find similar
causality from BTC to PC1, in the earliest (2015–2016) and most recent (2018–19) periods. There is
also evidence of causality from ETH to PC1 during the earlier period. The only period in which there
is causality from ETH to BTC (or vice versa) is 2017–2018. This coincides with the period in which
Antonakakis et al. (2019) note an intensification of spillovers from ETH. However, this effect subse-
quently subsides, suggesting the role of ethereum as a net transmitter may be short-lived, or at least
time-variant. Importantly, the results presented here, together with those shown in Antonakakis
et al. (2019), suggest empirical analysis in this nascent market are somewhat dependent on sample
period choice.
In summary, our results suggest that a single principal component explains a significant proportion
in the variance of cryptocurrency returns, and this proportion has increased over time. This principal

Ó 2020 The Economic Society of Australia

2020 ONE CRYPTOCURRENCY TO EXPLAIN THEM ALL? 127

component is closely related to bitcoin returns (as are other cryptocurrency returns) and the magni-
tude of the interrelationship has also increased. Together, this suggests that bitcoin returns are a key
driver of returns across cryptocurrency markets. One explanation for the importance of bitcoin regards
the additional investor and media attention it receives which creates network externalities. A second
is that the greater size and liquidity of bitcoin relative to other cryptocurrencies may attract a larger
number of institutional traders who generate trading strategies that use bitcoin as a reference point.

4. Conclusion
Cryptocurrencies have attracted a significant amount of attention. Institutional investors, attracted
by the potential of high returns and diversification benefits, are able to participate via futures mar-
kets, while several crypto ETFs are proposed. Our results have implications for the benefits of diversi-
fication across cryptocurrencies. In particular, if all cryptocurrency returns are driven by a factor that
is highly correlated to bitcoin then there may be less benefit to investing in smaller, less liquid cryp-
tocurrencies. Although this would have the benefit of freeing up time that would otherwise be
devoted to the process of considering the wide array of altcoins, it would mean that as investors con-
tinue to prefer bitcoin, a large proportion of new coins are destined to fail. Perhaps more importantly,
a greater degree of interdependence among cryptocurrencies, focused on a single factor, may lead to
a higher degree of systemic risk. This is particularly problematic should a few traders be able to nega-
tively influence the entire set of cryptocurrencies by liquidating their large bitcoin holdings. The
potential concerns relating to this will only increase as the trading of derivatives and ETFs relating to
cryptocurrencies becomes more widespread.

REFERENCES
Antonakakis, N., Chatziantoniou, I. and Gabauer, D. (2019), ‘Cryptocurrency Market Contagion: Market Uncer-
tainty, Market Complexity, and Dynamic Portfolios’, Journal of International Financial Markets, Institutions and
Money, 61, 37–51.
Balcilar, M., Bouri, E., Gupta, R. and Roubaud, D. (2017), ‘Can Volume Predict Bitcoin Returns and Volatility?’, A
quantiles-based approach, Economic Modelling, 64, 74–81.
Baur, D.G. and Dimpfl, T. (2018), ‘Asymmetric Volatility in Cryptocurrencies’, Economics Letters, 173, 148–51.
Baur, D.G., Hong, K.H. and Lee, A.D. (2018), ‘Bitcoin: Medium of Exchange or Speculative Assets?’, Journal of
International Financial Markets, Institutions and Money, 54, 177–89.
Bernsten, A. and Schar, F. (2018), ‘A Short Introduction to the World of Cryptocurrencies,’ Federal Reserve Bank of
St. Louis Review, 100, 1–16.
Borri, N. and Shakhnov, K. (2019), ‘The Cross-Section of Cryptocurrency Returns,’ Working Paper. https://papers.
ssrn.com/sol3/papers.cfm?abstract_id=3241485
Bouri, E., Molnar, P., Azzi, G., Roubaud, D. and Hagfors, L.I. (2017), ‘On the hedge and safe haven properties of
bitcoin: Is it really more than a diversifier?’, Finance Research Letters, 20, 192–98.
Bouri, E., Lau, C.K.M., Lucey, B. and Roubaud, D. (2019a), ‘Trading volume and the predictability of return and
volatility in the cryptocurrency market’, Finance Research Letters, 29, 340–46.
Bouri, E., Lucey, B. and Roubaud, D. (2019b), ‘Cryptocurrencies and the Downside Risk in Equity Investments’,
Finance Research Letters, In Press. https://doi.org/10.1016/j.frl.2019.06.009
Bouri, E., Lucey, B. and Roubaud, D. (2019c), ‘The Volatility Surprise of Leading Cryptocurrencies: Transitory and
Permanent Linkages’, Finance Research Letters, In Press. https://doi.org/10.1016/j.frl.2019.05.006
Bouri, E., Roubaud, D. and Shahzad, S.J.H. (2019d), ‘Do Bitcoin and Other Cryptocurrencies Jump Together?’,
The Quarterly Review of Economics and Finance, In Press. https://doi.org/10.1016/j.qref.2019.09.003
Brauneis, A. and Mestel, R. (2018), ‘Price Discovery of Cryptocurrencies: Bitcoin and Beyond’, Economics Letters,
165, 58–61.
Chaim, P. and Laurini, M.P. (2018), ‘Volatility and Return Jumps in Bitcoin’, Economics Letters, 173, 158–63.
Cheah, E.T. and Fry, J. (2015), ‘Speculative Bubbles in Bitcoin Markets?’ An Empirical Investigation into the Fun-
damental Value of Bitcoin,’ Economics Letters, 130, 32–6.
Corbet, S., Meegan, A., Larkin, C., Lucey, B. and Yarovaya, L. (2018), ‘Exploring the Dynamic Relationships
Between Cryptocurrencies and Other Financial Assets’, Economics Letters, 165, 28–34.
Dwyer, G.P. (2015), ‘The Economics of Bitcoin and OTHER Similar Private Digital Currencies’, Journal of Financial
Stability, 17, 81–91.
Dyhrberg, A.H. (2016), ‘Bitcoin, Gold and the Dollar – A GARCH Volatility Analysis’, Finance Research Letters, 16,
85–92.

Ó 2020 The Economic Society of Australia

128 ECONOMIC PAPERS JUNE

El Alaoui, M., Bouri, E. and Roubaud, D. (2019), ‘Bitcoin Price-Volume: A Multifractal Approach’, Finance Research
Letters, 31, 374–81.
Elendner, H., Trimborn, S., Ong, B. and Lee, T.M. (2018), ‘The Cross-Section of Crypto-Currencies as Financial
Assets: Investing in Crypto-Currencies Beyond Bitcoin,’ in Chuen D. L. K. and Deng R. (eds.), Handbook of Block-
chain, Digital Finance, and Inclusion. ISBN 9780128123003. Academic Press, Cambridge, MA; 145–73. https://doi.
org/10.1016/B978-0-12-810441-5.00007-5
Fama, E.F. and French, K.R. (1992), ‘The Cross-Section of Expected Stock Returns’, Journal of Finance, 47, 427–65.
Grobys, K. and Sapkota, N. (2019), ‘Cryptocurrencies and Momentum’, Economics Letters, 180, 6–10.
Guesmi, K., Saadi, S., Abid, I. and Ftiti, Z. (2019), ‘Portfolio Diversification with Virtual Currency: Evidence from
Bitcoin’, International Review of Financial Analysis, 63, 431–37.
Hu, A.S., Parlour, C.A. and Rajan, U. (2019), ‘Cryptocurrencies: Stylized Facts on a New Investible Instrument,’
Financial Management, 48, 1049–68.
Ji, Q., Bouri, E., Lau, C.K.M. and Roubaud, D. (2019), ‘Dynamic Connectedness and Integration in Cryptocur-
rency Markets’, International Review of Financial Analysis, 63, 257–72.
Johnson, R.A. and Wichern, D.W. (2013), Applied Multivariate Statistical Analysis, 6th edition. Pearson, New York,
NY.
Kochling, G., Muller, J. and Posch, P.N. (2019), ‘Price Delay and Market Frictions in Cryptocurrency Markets’, Eco-
nomics Letters, 174, 39–41.
Koutmos, D. (2018), ‘Return and Volatility Spillovers among Cryptocurrencies’, Economics Letters, 173, 122–27.
Liew, J.K.S., Li, R.Z., Budavan, T. and Sharma, A. (2019), ‘Cryptocurrency Investing Examined’, The JBBA, 2, 1–
12.
Liu, Y. and Tsyvinski, A. (2018), ‘Risks and Returns of Cryptocurrency’, NBER Working Paper No. 24877. https://
www.nber.org/papers/w24877
Liu, Y., Tsyvinski, A. and Wu, X. (2019), ‘Common Risk Factors in Cryptocurrency’, NBER Working Paper No.
25882. https://www.nber.org/papers/w25882
Phillip, A., Chan, J.S.K. and Peiris, S. (2018), ‘A New Look at Cryptocurrencies’, Economics Letters, 163, 6–9.
Shams, A. (2019), ‘What Drives the Covariation of Cryptocurrency Returns,’ Working Paper. https://pdfs.seman
ticscholar.org/48f1/8e23e6263b9be1bd0d30281b3385af2344e2.pdf
Smales, L.A. (2019), ‘Bitcoin as a Safe Haven: Is it Even Worth Considering?’, Finance Research Letters, 30, 385–93.
Urquhart, A. (2016), ‘The Inefficiency of Bitcoin’, Economics Letters, 148, 80–82.
Urquhart, A. (2017), ‘Price Clustering in Bitcoin’, Economics Letters, 159, 145–148.
Vidal-Tomas, D. and Ibanez, A. (2018), ‘Semi-Strong Efficiency of Bitcoin’, Finance Research Letters, 27, 259–65.
Wei, W.C. (2018), ‘Liquidity and Market Efficiency in Cryptocurrencies’, Economics Letters, 168, 21–4.
Yermack, D. (2013), ‘Is Bitcoin a Real Currency? An Economic Appraisal,’ NBER Working Paper 19747. https://
www.nber.org/papers/w19747

Ó 2020 The Economic Society of Australia

 Appendix A
2020

Correlation Matrix of Daily Cryptocurrency Returns

BTC BNB DASH EOS ETC ETH LTC NEO XLM XMR XRP BAT DCR DOGE LSK NANO OMG QTUM WAVES XEM

BNB 0.525
DASH 0.406 0.374
EOS 0.538 0.424 0.516
ETC 0.408 0.421 0.386 0.553
ETH 0.438 0.493 0.424 0.635 0.452
LTC 0.493 0.338 0.586 0.520 0.560 0.601
NEO 0.416 0.513 0.410 0.531 0.460 0.457 0.465
XLM 0.361 0.354 0.284 0.482 0.307 0.307 0.378 0.324

Ó 2020 The Economic Society of Australia

XMR 0.467 0.414 0.400 0.541 0.350 0.410 0.535 0.339 0.337
XRP 0.368 0.326 0.175 0.504 0.255 0.289 0.434 0.265 0.541 0.251
BAT 0.500 0.436 0.502 0.453 0.529 0.626 0.403 0.471 0.537 0.568 0.459
DCR 0.424 0.347 0.421 0.477 0.271 0.365 0.452 0.332 0.307 0.350 0.263 0.488
DOGE 0.486 0.417 0.293 0.432 0.382 0.356 0.400 0.363 0.432 0.321 0.359 0.501 0.359
LSK 0.284 0.432 0.326 0.519 0.438 0.374 0.482 0.467 0.241 0.301 0.182 0.548 0.226 0.275
NANO 0.455 0.349 0.417 0.407 0.434 0.470 0.352 0.458 0.321 0.417 0.363 0.452 0.383 0.379 0.447
OMG 0.571 0.505 0.585 0.570 0.592 0.716 0.416 0.696 0.516 0.571 0.509 0.630 0.533 0.534 0.599 0.524
QTUM 0.586 0.487 0.555 0.566 0.608 0.617 0.467 0.583 0.506 0.559 0.515 0.513 0.506 0.505 0.601 0.441 0.612
WAVES 0.492 0.369 0.388 0.476 0.316 0.446 0.439 0.388 0.337 0.413 0.255 0.538 0.358 0.392 0.490 0.409 0.572 0.559
XEM 0.404 0.357 0.347 0.491 0.357 0.315 0.462 0.372 0.392 0.306 0.303 0.557 0.377 0.365 0.264 0.330 0.560 0.544 0.323
ZEC 0.382 0.447 0.432 0.574 0.392 0.429 0.557 0.358 0.291 0.413 0.292 0.558 0.292 0.341 0.370 0.438 0.603 0.599 0.320 0.322
BCN 0.114 0.195 0.092 0.214 0.083 0.113 0.201 0.094 0.070 0.086 0.115 0.113 0.047 0.115 0.075 0.107 0.191 0.206 0.131 0.140
ONE CRYPTOCURRENCY TO EXPLAIN THEM ALL?

BTS 0.247 0.231 0.164 0.309 0.246 0.232 0.259 0.231 0.166 0.177 0.125 0.325 0.258 0.170 0.187 0.246 0.328 0.316 0.241 0.216
DGB 0.434 0.413 0.324 0.570 0.403 0.438 0.532 0.404 0.472 0.360 0.415 0.533 0.365 0.493 0.308 0.419 0.614 0.594 0.392 0.377
GXC 0.457 0.403 0.437 0.398 0.458 0.505 0.351 0.457 0.437 0.435 0.375 0.445 0.400 0.428 0.419 0.342 0.422 0.535 0.414 0.404
KMD 0.348 0.305 0.304 0.455 0.326 0.392 0.406 0.304 0.273 0.357 0.247 0.464 0.341 0.300 0.359 0.369 0.501 0.539 0.433 0.257
MONA 0.247 0.231 0.164 0.309 0.246 0.232 0.259 0.231 0.166 0.177 0.125 0.325 0.258 0.170 0.187 0.246 0.328 0.316 0.241 0.216
REP 0.312 0.408 0.335 0.528 0.368 0.383 0.463 0.298 0.284 0.355 0.248 0.495 0.263 0.289 0.228 0.405 0.520 0.544 0.310 0.279
SC 0.369 0.467 0.363 0.481 0.401 0.360 0.496 0.427 0.342 0.328 0.244 0.543 0.409 0.420 0.330 0.393 0.570 0.545 0.439 0.316
XVG 0.222 0.251 0.186 0.379 0.205 0.188 0.394 0.242 0.150 0.169 0.107 0.471 0.264 0.229 0.228 0.333 0.463 0.437 0.284 0.209
AE 0.382 0.386 0.387 0.489 0.345 0.394 0.331 0.322 0.327 0.333 0.283 0.280 0.328 0.331 0.369 0.295 0.455 0.392 0.343 0.331
ARDR 0.253 0.245 0.232 0.316 0.282 0.324 0.305 0.273 0.237 0.220 0.231 0.301 0.154 0.235 0.279 0.277 0.374 0.321 0.258 0.283
129
 Appendix A. (Continued)
130

BTC BNB DASH EOS ETC ETH LTC NEO XLM XMR XRP BAT DCR DOGE LSK NANO OMG QTUM WAVES XEM

ETP 0.312 0.219 0.304 0.262 0.319 0.330 0.238 0.304 0.290 0.295 0.269 0.293 0.296 0.295 0.304 0.276 0.266 0.309 0.282 0.261
GNT 0.481 0.383 0.469 0.518 0.509 0.584 0.462 0.431 0.406 0.517 0.328 0.599 0.408 0.422 0.526 0.457 0.589 0.533 0.458 0.467
MAID 0.457 0.401 0.318 0.499 0.403 0.430 0.487 0.420 0.361 0.345 0.263 0.564 0.430 0.344 0.288 0.438 0.576 0.535 0.443 0.345
MCO 0.406 0.352 0.430 0.369 0.397 0.489 0.345 0.384 0.393 0.462 0.318 0.459 0.365 0.380 0.492 0.375 0.462 0.401 0.434 0.415
SNT 0.506 0.395 0.476 0.509 0.543 0.593 0.415 0.541 0.642 0.525 0.523 0.568 0.471 0.510 0.530 0.346 0.560 0.501 0.503 0.613
STEEM 0.373 0.377 0.346 0.484 0.286 0.324 0.422 0.325 0.361 0.322 0.266 0.509 0.325 0.351 0.216 0.341 0.536 0.523 0.320 0.348
XZC 0.303 0.360 0.322 0.489 0.279 0.344 0.367 0.252 0.224 0.357 0.194 0.514 0.275 0.284 0.321 0.428 0.553 0.483 0.321 0.303
ZEN 0.404 0.306 0.405 0.378 0.399 0.435 0.353 0.317 0.339 0.428 0.343 0.422 0.395 0.369 0.437 0.347 0.453 0.373 0.396 0.393

Sample Period: April 2013–August 2019

ZEC BCN BTS DGB GXC KMD MONA REP SC XVG AE ARDR ETP GNT MAID MCO SNT STEEM XZC

BNB
DASH
EOS
ETC
ETH
LTC
ECONOMIC PAPERS

NEO
XLM
XMR
XRP
BAT
DCR
DOGE
LSK
NANO
OMG
QTUM
WAVES
XEM
ZEC
BCN 0.107
JUNE

Ó 2020 The Economic Society of Australia

BTS 0.213 0.055
 2020

Appendix A. (Continued)

ZEC BCN BTS DGB GXC KMD MONA REP SC XVG AE ARDR ETP GNT MAID MCO SNT STEEM XZC

DGB 0.364 0.122 0.171

GXC 0.470 0.169 0.262 0.509
KMD 0.304 0.110 0.191 0.345 0.366
MONA 0.213 0.055 0.980 0.171 0.262 0.191

Ó 2020 The Economic Society of Australia

REP 0.337 0.100 0.204 0.323 0.389 0.305 0.204
SC 0.343 0.104 0.185 0.396 0.454 0.352 0.185 0.315
XVG 0.228 0.151 0.091 0.220 0.314 0.271 0.091 0.167 0.215
AE 0.368 0.197 0.159 0.383 0.351 0.318 0.159 0.339 0.340 0.255
ARDR 0.225 0.204 0.215 0.316 0.216 0.192 0.215 0.255 0.315 0.173 0.216
ETP 0.329 0.063 0.229 0.328 0.333 0.255 0.229 0.278 0.332 0.250 0.264 0.182
GNT 0.449 0.142 0.322 0.489 0.447 0.384 0.322 0.512 0.477 0.300 0.332 0.258 0.311
MAID 0.363 0.074 0.217 0.393 0.418 0.395 0.217 0.363 0.347 0.183 0.327 0.247 0.312 0.549
MCO 0.447 0.116 0.241 0.390 0.298 0.508 0.241 0.400 0.449 0.324 0.344 0.271 0.166 0.443 0.467
SNT 0.551 0.153 0.267 0.648 0.506 0.431 0.267 0.514 0.562 0.463 0.372 0.324 0.275 0.587 0.550 0.356
STEEM 0.328 0.090 0.218 0.436 0.425 0.337 0.218 0.279 0.329 0.237 0.335 0.249 0.270 0.469 0.379 0.432 0.582
XZC 0.314 0.075 0.184 0.335 0.434 0.308 0.184 0.322 0.284 0.156 0.288 0.175 0.358 0.345 0.310 0.357 0.494 0.253
ZEN 0.431 0.088 0.304 0.342 0.308 0.372 0.304 0.327 0.380 0.371 0.275 0.210 0.246 0.443 0.462 0.368 0.326 0.375 0.423
ONE CRYPTOCURRENCY TO EXPLAIN THEM ALL?

Sample Period: April 2013–August 2019.

131
132 ECONOMIC PAPERS JUNE

Appendix B

Principal Component Scree Plot (Overall Sample and Quartiles)

Ó 2020 The Economic Society of Australia

Copyright of Economic Papers is the property of Wiley-Blackwell and its content may not be
copied or emailed to multiple sites or posted to a listserv without the copyright holder's
express written permission. However, users may print, download, or email articles for
individual use.