The crypto industry, however, consists of much more than just currencies. Companies are increasingly issuing utility and security tokens. So how will Bitcoin volatility impact these new assets?
Existing data and research, though limited, already suggests a correlation between Bitcoin and the broader stock market. In February, Nick Colas, co-founder of DataTrek Research, issued a report that found on a 90-day basis, the correlation between the daily percent returns of the cryptocurrency and the S&P 500 was 33 percent, the highest since the cryptocurrency started gaining public attention in January 2016.
Colas is one of the first strategists on Wall Street to write about Bitcoin.
The previous high of the last two years was much lower, at 19 percent, in mid-December 2017, Colas wrote.
The question is how much Bitcoin volatility will influence the token market. Though the two assets are related, they are also fundamentally different. Bitcoin dervives much of its value from scarcity; theoretically, only 21 million exist.
Companies can issue as many tokens as they wish. Utility tokens allow users to access a product or service on the Blockchain. The value of such tokens depends on how much people want that product or service. Security tokens can represent real estate, art, and even ownership in a company.
For assets to appeal to investors, especially to ones looking to diversify, they must operate with some degree of market independence. Why buy tokens if they just simply mirror Bitcoin?
We must first remember that cryptocurrencies, whether coins or tokens, represent entirely new asset classes so the markets are naturally volatile. Just as the global economy is essentially pegged to the U.S. dollar, the crypto industry follows the lead of the most dominant coin in Bitcoin.
But tokens are unique. The connection between Bitcoin and utility tokens in particular is tenuous at best.
For the most part, people are currently trading utility tokens as pure speculative investments. Eventually, though, people will trade these assets because they actually need the products and services they represent. But they are still very much in their infancy.
“The valuation of the utility tokens is based on intuition and is more dependent on the future data and value that will be projected by the company,” according to a blog post by Straight Off the Ledger. “Hence, the valuation methods are not concrete enough to decide about the investment.”
So absent of a concrete method to determine value, investors will instinctively compare them to Bitcoin.Again, all of this is still very early. However, strong correlations between stocks, coins, and tokens would defeat the reasons why people should invest in crypto in the first place, in that they offer investors an attractive, unique alternative to traditional investments.
“Bitcoin’s attraction for institutional investors may increase correlation,” Morgan Stanley equity analyst James E. Faucette wrote in a research note. “Our conversations with investors certainly give weight to that view—which raises a key question: if Bitcoin correlation with the broader market fully materializes, does that limit its ultimate potential?”
GLASS, though, could play an important role in reducing the correlation between Bitcoin and token volatility. One reason why investors will instinctively peg tokens to Bitcoin is the lack of large, stable markets to provide liquidity and transparency to investors who wish to trade tokens and determine their value.
One uncertainty that hangs over the token market is the lack of clear regulation. The Securities and Exchange Commission said they will decide whether a token is either utility or security on a case by case basis. GLASS connects crypto exchanges around the world and allows investors to legally buy and sell tokens no matter the location and no matter if regulators deem them utility or security.
GLASS hopes to provide much needed stability and liquidity to the nascent asset class, two things that tokens need to truly set themselves apart from Bitcoin.
Lessening the correlation between token and Bitcoin volatility will take time but GLASS offers a good first step to make tokens more of an independent asset.