1. 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

2. 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 cryptocurrency at the end of September - $ 220 billion, the share of Bitcoin 51%Volumes of primary placement of tokens:
Объемы первичного размещения токенов:
billion dollars.- Jan.-Jul
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

3. 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, 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%

4. 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.

5. 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 Mar 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 %

6. 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 Mar 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

7. 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 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

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

9. 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

10. Thanks for attention!