Correlation Between Ethereum and Bitcoin
Can any of the company-specific risk be diversified away by investing in both Ethereum and Bitcoin at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Ethereum and Bitcoin into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Ethereum and Bitcoin, you can compare the effects of market volatilities on Ethereum and Bitcoin and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Ethereum with a short position of Bitcoin. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ethereum and Bitcoin.
Diversification Opportunities for Ethereum and Bitcoin
Almost no diversification
The 3 months correlation between Ethereum and Bitcoin is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Ethereum and Bitcoin in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bitcoin and Ethereum is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Ethereum are associated (or correlated) with Bitcoin. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bitcoin has no effect on the direction of Ethereum i.e., Ethereum and Bitcoin go up and down completely randomly.
Pair Corralation between Ethereum and Bitcoin
Assuming the 90 days trading horizon Ethereum is expected to under-perform the Bitcoin. In addition to that, Ethereum is 1.19 times more volatile than Bitcoin. It trades about -0.1 of its total potential returns per unit of risk. Bitcoin is currently generating about -0.06 per unit of volatility. If you would invest 6,943,446 in Bitcoin on January 26, 2024 and sell it today you would lose (311,709) from holding Bitcoin or give up 4.49% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Ethereum vs. Bitcoin
Performance |
| Timeline |
| Ethereum |
| Bitcoin |
Ethereum and Bitcoin Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Ethereum and Bitcoin
The main advantage of trading using opposite Ethereum and Bitcoin positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Ethereum position performs unexpectedly, Bitcoin can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Bitcoin will offset losses from the drop in Bitcoin's long position.The idea behind Ethereum and Bitcoin pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.Check out your portfolio center.Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.
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