The Correlation Between Cryptocurrency Value And Exchange Listings
Tags: Bitcoin, Tokenization, Correlation, Cryptocurrency, Valuation

The first cluster includes Bitcoin, Litecoin, Ethereum, and Bitcoin Cash. This group of cryptocurrencies are all listed on over 75 exchanges. The second cluster of cryptocurrencies are scattered between 15 and 55 exchange listings. The second includes DASH, Ripple, ZCash, and popular cryptocurrencies. Finally, the vast majority (~98%) of cryptocurrencies have 15 or fewer exchange listings.

Statistical summaries show that median cryptocurrency is listed on just two exchanges and the average is listed on just under four exchanges. Using a box plot to graphically describe the data shows the large number of outliers in relation to the majority of cryptocurrencies.

Box Plot of Exchange Listings. Data obtained from http://www.coinmaketcap.com on December 10th 2017.

In general, the major outliers widely function as mediums of exchange and stores of value. To be globally valuable as intermediary instruments used to facilitate buying, selling, or trading goods and services, these cryptocurrencies should be listed on many exchanges as possible. Currencies generally have more legitimacy the more widely they are used, and listing on many exchanges advances those network effects.

Not all of the outliers present in the dataset serve as money. Ethereum is an exception. Though it was designed with a different purpose in mind, the market decided that it too should function as a medium of exchange and store of value.

There are other exceptions in the first and second cluster of cryptocurrencies. Qtum and TenX were also not purposed as mediums of exchange, yet they are listed on over 15 exchanges.

Strategy Implications

In spite of these outliers, analyzing the relationship between value and exchange listings has implications for cryptocurrency strategy. Further dividing cryptocurrencies into subsets and rerunning the analysis provides more meaningful information to can reinforce or redirect the intuition of a cryptocurrency strategist.

Knowing that the outliers are primarily used as stores of value or mediums of exchange, it only makes sense to list widely if planning to compete with cryptocurrencies used as money. There are always exceptions. However, if the purpose of a cryptocurrency is to be a better form of money, then it may need to be widely listed to in order to compete with the other widely listed currencies.

For example, cryptocurrencies competing to be a medium of exchange in Venezuela may increase their market capitalization through listing on a Venezuelan cryptocurrency exchange. With each new geographical market entered, it might experience additional increases in value.

This might not be the case with tokens. Since tokens usually represent an asset, the economics of valuation with respect to exchange listings may be different. Being listed on a Venezuelan exchange may add no value at all.

Security tokens may observe increased market capitalization with exchange listings, as investors will appreciate more trading options in the case there are problems at one of the major centralized exchanges. However, there will most likely be diminishing returns to increasing exchange listings.

The Long Tail

Focusing on cryptocurrencies with fewer than 15 listings makes sense for getting a rough idea of the relationship between value and exchange listings for average tokens. This subset is the third cluster of cryptocurrencies. They represent over 97% of the top 1000 cryptocurrencies. This cluster also includes cryptocurrencies, like IOTA and NEM, which are not tokens but are highly valued and listed on fewer exchanges than their peers.

Top 1000 Cryptocurrency [Data Source: http://www.coinmarketcap.com]

Graphically, with the aid of a histogram, it is possible to observe the concentration of cryptocurrencies. The chart exposes the first and second clusters as the long tail cryptocurrency exchange listings.

Focusing third cluster makes it possible to notice that the linear correlation between market capitalization and exchange listings drops to 20%. That means that it might not really matter that much how many exchanges the average token is listed on. The correlation between the average token’s value and exchange listings is not very significant.

Summary

The ICO is becoming an increasingly popular fundraising vehicle. Traditional businesses are starting to look to this crowdfunding mechanism and bypassing other traditional forms of financing.

Nonetheless, planning an initial coin offering requires a lot of thought and thorough research. Even deciding which exchanges to list on and how many exchanges to list on requires careful research. Fortunately, there are already hundreds of cryptocurrencies out there that can help to determine if it is worth the time and effort to pursue a certain strategy.

There is a correlation between market capitalization, but it is not very strong. Be guided by that. Whenever in doubt about correlation and causation, just look at Litecoin and Bitcoin. Litecoin is listed on 94 exchanges compared to Bitcoin’s 88, yet Bitcoin is magnitude larger in market capitalization.