What is Cryptocurrency?
A cryptocurrency is a digital asset designed to function as a medium of exchange. “Crypto” refers to cryptography which are methods of creating protocols used to prevent third parties from reading private messages. With modern technology, these methods can be used for data confidentiality, data integrity, and authentication. More specifically, for cryptocurrencies, this allows for a decentralized, secure form of digital assets.
Bitcoin was the first cryptocurrency to see any success and has become a worldwide phenomenon. Other cryptocurrencies, called “alt-coins”, exist but have not seen the same success. Some of the things that separate bitcoin from these alt-coins is it’s supply cap, high level of security, true decentralization, and role as the cryptocurrency with the highest market cap. Though bitcoin has remained the highest valued cryptocurrency around, there is nothing preventing an alt-coin from taking that place. By looking at trends in data, we may be able to see where bitcoin stands amongst the altcoins.
Cryptocurrency’s decentralized nature makes it hard to find data across all brokerages. Instead, we’ll look at futures trading data published by Kraken, one of the largest and longest running trading platforms. Bitcoin first came to fruition in 2009 and Kraken became a place you could buy bitcoin shortly after, in 2011. It’s longevity has gained trust from holders of bitcoin and today it is mostly used for trading cryptocurrencies and futures contracts. Futures contract are derivative financial contracts where a person agrees to buy or sell an asset(in this case cryptocurrency) at a later date. Kraken allows the trade of some of the largest and most used cryptocurrencies worldwide and they publish data on every trade.
The purpose of this study is to explore bitcoin’s dominance as the largest market cap cryptocurrency. In order to do this, bitcoins trading activity was compared against altcoin trading activity. The sample was taken from Kraken’s published historical data. They have published data on every trade from 2018 to October, 2020. The data initially comes like this:
This data includes the time at which trades were executed, what coins were traded, the price they were traded at, the size(in dollars) of the trade, and some other information that wasn’t used in this study. In order to study bitcoin against altcoins, I created a function to separate the data. Bitcoin is marked as “XBT” in this data so any trades containing “XBT” were given a value of 1 and all other trades were given a value of 0. Here is the function used:
After effectively marking all trades that involved bitcoin, I trimmed all the unnecessary information that wasn’t used in this study and ended up with a more concise data set:
It should be noted that there are limitations to this sample. This is trading data from only one broker out of many. While this broker allows the trades of some of the most popular coins, it doesn’t allow the trade of all cryptocurrencies. Also, this sample contains over three years worth of data. During those three years, any of Kraken’s competitive business practices that may have increased or decreased trading activity are not accounted for in this study.
First, I broke the data down by months and then years to get an idea of what happened over time:
Against my expectations, neither bitcoin nor altcoins seemed to trade in significantly higher volumes. There were times where one would trade more than the other but that never lasted and didn’t occur with any regularity. Overall, trading volume seemed to grow over time.
Next, I separated the data by years:
Again neither bitcoin nor altcoins seemed to be consistently trading at higher volume than the other. In this graph it is much easier to see the overall growth in volume. It should be noted that 2020 only contains 10 months of data as the rest hasn’t been released. This means that in 10 months of trading, 2020 already had higher volume than 2019.
Next, I summed all trades from bitcoin and altcoins irrespective of time and made them into percentage totals:
To my surprise, the two were very similar in number of trades. They were both close to 50%.
The similarity in number of trades was interesting but it only tells half the story. Next, I multiplied the trades by their amounts in dollars in order to get the total amount of dollars traded in bitcoin and altcoins. To do this, first the data was subset in bitcoin and altcoin trades, and then the size(in dollars) was summed.
In all three years, altcoins saw over $3 billion worth of futures trading and bitcoin saw over $1.5 billion. Put in percentages, it looks like this:
Again, another surprise. My idea of bitcoin dominance was getting checked at every result.
Hypothesis testing the sample over time may include influence from variables specific to Kraken’s trading platform. Since the sample doesn’t include all tradeable coins on the market, testing the trade totals of the sample seemed like an ineffective study. Knowing this, the best data that can be extracted from the sample would be a relationship between order size and coin traded.
Null Hypothesis: There is no relationship between the type of coin traded and the size of the order in dollars.
Alternative Hypothesis: There is a relationship between the type of coin traded and the size of the order in dollars.
In order to test this, I first had to divide the order sizes into groups. As to avoid making any arbitrary categorizations, I divided the groups by order of magnitude:
Any orders under $1000 were given a value of 0, orders between $1000 and $10k were given a value of 1, and orders above $10k were given a value of 2. Using these groups, I began to sort the data and compare it by coin type and then order size. With this information, I conducted a Chi-square test:
Interestingly enough, even though bitcoin was not a resounding winner in terms of trade volume or dollar amount traded, it was the coin most often traded for a higher price. With a p-value of 0.0, at an alpha level of 0.05, the null hypothesis is rejected. There is a statistically significant relationship between the cryptocurrency traded, and the size of the order.
Note: I never got a p-value of 0.0 until this test. After researching possible reasons, I suspect my sample size was too large. If there are any other mistakes in my work that led to this result, please reach out to me and let me know.
Though bitcoin has the highest market cap(more than double the next largest altcoin), and is the most well-known cryptocurrency around the world, it does not have the dominance I expected. There are times when altcoins seem to have more popularity and trade at higher volumes. Over time, all cryptocurrency trading seems to be growing rapidly.
Still, bitcoin is most likely to trade at higher order sizes compared to altcoins. There could be a number of reasons for this. Perhaps bitcoins larger market cap attracts traders with more capital. Another possibility is that smaller market capitalized coins attract traders with smaller capital looking for more volatility and a chance to double or triple their money. It’s hard to make any final judgement on why bitcoin generally trades in higher dollar amounts even though its traded less.
Exploring this data has uncovered a lot of unexpected insight into trading trends of cryptocurrencies. I began this study with a bias that bitcoin was towering over other cryptocurrencies as a medium of exchange. This bias was clearly wrong. Knowing this, in the future I may compare bitcoin to specific altcoins to see what other surprises there are.