Cluster structure of the cryptocurrency market and market risk diversification opportunities of investment portfolio cryptoactives Alexander Maslennikov Research officer Center for Energy Studies E.M. Primakova Institute of World Economy and International Relations of Russian Academy of Sciences IV International Scientific and Practical Conference of the International Network Institute in the AML / CFT area "The era of cryptoeconomics: new challenges and Regtech in the field of AML / CFT“ Moscow, November 12, 2018

Despite the active development of the cryptocomplex, institutional investors do not yet consider cryptocurrency as a full-fledged investment asset. The total market capitalization of 1959 cryptocurrency at the end of September - $ 220 billion, the share of Bitcoin 51%Volumes of primary placement of tokens: Объемы первичного размещения токенов: 2017 - 3.7 billion dollars.- Jan.-Jul. 2018 more than 17 billion dollars. Investments of institutional investors in cryptocurrencies are insignificant endowment of Yale University (October 2018) Andreessen Horowitz - $ 300 million hedge fund, a broad investment declaration

Cryptocurrencies are characterized by very high market risks Cryptocurrencies are characterized by very high market risks. At the same time, Bitcoin is the least risky of cryptocurrencies Analysis period: January 1, 2016 - March 31, 2018 Source of source data on quotes and market capitalization - coinmarketcap.com 2188 cryptocurrencies, of which 283 were actively traded during the entire period (more than 90% of days) Bitcoin: Value at Risk (VaR) 11.6% Expected loss (expected shortfall) 14.7%

Bitcoin's market risks are significantly higher than those of traditional investment assets and currencies In terms of standard market risk measures - cost at risk (VaR) and expected losses (expected shortfall) - investing in Bitcoin is almost twice as risky than futures contracts for natural gas and gasoline.

Cluster analysis shows that Bitcoin’s market risks cannot be significantly reduced by diversifying the investment portfolio at the expense of other cryptocurrencies The largest correlation cryptocurrency grab indicator Peaks - the 8 largest average- capitalized cryptocurrency in January. 2016 - Mar. 2018 more than $ 1 billion Ribs - Spearman Yield Rank Correlation Coefficient> 0.39 Cluster 1: bitcoin, litecoin Cluster 2: ethereum, monero, dash Cluster 3: stellar, XRP, NEM Value at Risk (VaR) of Bitcoin briefcase + dash + stellar portfolio (11.3%) is slightly lower than VaR Bitcoin (11.6%). The expected losses (expected shortfall) are the same - 14.7%

Bitcoin is the main price leader in the global cryptocomplex Correlation graph of active cryptocurrency: • Large peaks - 8 largest cryptocurrencies with an average capitalization in January. 2016 - Mar. 2018 more than $ 1 billion • Small peaks - other active cryptocurrencies Ribs - the rank correlation coefficient of Spearman returns> 0.39 (for large peaks) and 0.3 (for small peaks Correlated middle-sized cryptocurrencies Crypto Currency Cluster Qty Average market capitalization, million dollars bitcoin К1 86 812 litecoin 7 275 Total К1 93 1086 ethereum К2 2 26 dash monero 3 247 Total К2 5 272 XRP КЗ NEM 4 106 stellar 9 733 Total КЗ 13 839

Institutional investments in the cryptocomplex are also hampered by the uncertainty of the regulatory environment, high operational risks and underdeveloped trading infrastructure Market risks - increased and non-systematic volatility of cryptocurrency quotes Uncertainty of regulatory environment Since 2014, CFTC (Commodity Futures Trading Commission) classifies cryptocurrencies as the category of commodity instruments (commodities) SEC (Securities and Exchange Commission) applies an individual approach to each cryptocurrency. Only in June 2018 SEC explained that bitcoin and ethereum will not be classified as securities, and most tokens will be. Operational risks low liquidity of most cryptoactive assets risks of losing investments due to hacker attacks risks associated with ML/FT. Each cryptocurrency unit has its own transaction history Underdevelopment of trade infrastructure There are no large investment banks among market makers in cryptocurrencies No ETF for cryptocurrency. At the beginning of November 2018, the SEC has already rejected 9 crypto ETF projects

Futures contract for Bitcoin on the Chicago Commodity Exchange has not yet been able to attract liquidity Futures contract for bitcoin on CME

Main conclusions Cryptocurrencies are characterized by a very high level of market risk in comparison with traditional classes of investment assets. Investing in the least risky cryptocurrency - Bitcoin - is almost twice as riskier as in the most volatile traditional instrument considered - natural gas futures contract Bitcoin remains the main price leader in the global cryptocomplex Bitcoin’s market risks cannot yet be reduced by diversifying the portfolio into other cryptocurrencies, primarily due to the excessive price volatility of the latter However, the process of establishing a regulatory environment around the cryptocomplex and improving the infrastructure for trading cryptocurrencies will help smooth out price fluctuations and increase opportunities to diversify cryptocurrency investment portfolios

Thanks for attention!