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chain news
(ID: chainnewscom), Author: Aaron Brown, Compiler: Wang Ze reposted with authorization.Among cryptocurrencies, Bitcoin is the largest and most well-known. In addition, new encrypted assets are launched almost every day, but how to analyze and evaluate their value, investors have no idea, and there are no established tools available . factor analysis ？
why not try
Factor Analysis
Factor analysis is a very common quantitative analysis tool in the stock market. This powerful quantitative analysis tool is often used to break down the stock market into three to six factors, each of which is a specially constructed portfolio.
For example, valuation factors are those that favor stocks with low price-to-book ratios and bear against stocks with high price-to-book ratios. The rationale is that the long-term projected returns of a diversified portfolio can be explained by exposure to these factors, so that you dont need to know the individual stocks you hold to expect their performance.In addition to the stock market, factor analysis can also be used for any other target, including the cryptocurrency market, and the dismantled factors can also be any number. The model in the classic 1992 paper Fama-French uses three factors. Later researchers usually use five to six factors for analysis, and some researchers use more factors for stock analysis.：
In the stock market, the most common factors include the following categories:Size factor, valuation factor, growth factor, profit factor, momentum reversal factor, trading factor, volatility factor, etc.
scale factor, including: total market capitalization, market capitalization in circulation, market capitalization in free circulation and other indicators;
valuation factors, including: price-to-earnings ratio, price-to-book ratio, price-to-sales ratio, price-to-cash ratio, enterprise value multiple and other indicators;
growth factor, including: year-on-year growth rate of operating income, year-on-year growth rate of operating profit and other indicators;
profit factor, including: return on equity ROE, return on total assets ROA, sales gross profit margin, sales net profit rate and other indicators;
momentum reversal factor, including: several months of rise and fall and other indicators;
Trading Factor, including indicators such as the daily average turnover rate in the previous period;
volatility factor
, including indicators such as volatility and amplitude in the previous period.
For encrypted assets, the amount of data we currently have is not enough and the quality is not good, so it is difficult to conduct complex factor analysis like the stock market.But it might as well give it a try. I used the factor analysis method to analyze the trend of cryptocurrencies from February last year to March this year, and obtained some interesting findings.Through statistics, I found four factors: respectively
Scale, Service, Quality, Token
, that is, the four combinations are sufficient to explain the returns of encrypted assets over the past ten months.
Factor analysis uses mathematical methods to construct uncorrelated portfolios to capture as much as possible changes in cryptocurrency price fluctuations. In this case, I found that these four factors can be used to explain 70% of the variation in daily price fluctuations of crypto assets. The other factors, each reflecting less than 7% variation additionally, could be considered random noise given the amount and quality of the data.
image description
Yellow Line: Scale Orange Line: Quality Gray Line: Service Green Line: TokentextOverall, the blue line representsServeFactor combination, roughly in line with Bitcoins price fluctuations during this period. But the other three combinations showed very different patterns.scaleThe factor combination had the largest increase and the smallest decrease.Factor portfolios used to earn decent gains, but crashed the most. By cryptocurrency standards,andqualityandTokenServe
The performance of the factor combination showed a continuous and rapid decline, and the performance of the other three factors appeared to be flat.textIn the graph, I have indicated by the yellow line
scaleThe performance of the factor combination. In this factor combination, I did not include Bitcoin and Ethereum. These two super virtual currencies have zero weight in this combination. etc., relatively small, but also sizeable and important cryptocurrencies. In this combination, currencies such as Ripple, Litecoin, NEM and Ethereum Classic are roughly equally weighted. Litecoin is a clone of Bitcoin, and Ethereum Classic is a derivative of Ethereum.When the price of Bitcoin plummets,
scaleThe factor portfolio has not fallen as badly, and trend investors should favor its price chart; value investors should proceed with caution. Ripple and NEM solve some of the problems that Bitcoin has. They are Bitcoins competitor to Ethereum, with a vibrant and talented developer community, but more nimble than those gigantic currencies. The value of the size factor portfolio increased three times, more than tripling each time, while remaining flat in between.The red line indicates
qualityThe trend of the factor combination, the factor combination is good for Bitcoin and bad for Ethereum. Across most categories, the “Quality” factor portfolio is positive for the largest virtual asset by market capitalization, and less bearish for all of its assets. Although a high market capitalization does not necessarily mean high quality, the most successful virtual assets in their respective categories are also often the largest. Perhaps this factor combination is called past achievement more appropriately. During the time period I analyzed, the Quality factor portfolio rose 50% during this period, but doubled and then fell back twice. This factor combination failed to clearly outperform its peers.Serve
FinallyThe trend of the factor combination, which is positive for encrypted assets that carry out specific services, such as STEEM social media, Factom and Maidsafe secure data storage and transfer, Augur prediction market and Iconomi to manage digital assets, but bearish for various payment-purpose cryptocurrencies . The service factor portfolio, which was worth $1 invested in February 2017, has since grown to over $9 before falling to $3.50. This is the only factor combination that has really plummeted, which either means that the concept of service has failed, or that service-type encrypted assets are undervalued during the time period I studied.Finally
currency
The factor combination, represented by the green line in the figure, is good for virtual currencies such as Bitcoin and Litecoin, and bad for smart contracts and service tokens such as Ethereum. The combination initially fell, but its later rise was the most consistent of all the factor combinations, although around the end of 2017, it was also the first to fall.
The chart doesnt predict the future, but it suggests four areas to watch:
First, can second-tier crypto assets that challenge Bitcoin and Ethereum triple again? The surge in virtual currencies in 2017 was largely due to this.
Second, can the leaders of various virtual assets outperform their competitors? On average, they achieved this in 2017, but there were quite a few reversals.
