Correlation Between Bitcoin and Ethereum

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Can any of the company-specific risk be diversified away by investing in both Bitcoin and Ethereum 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 Bitcoin and Ethereum into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Bitcoin and Ethereum, you can compare the effects of market volatilities on Bitcoin and Ethereum 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 Bitcoin with a short position of Ethereum. Check out your portfolio center. Please also check ongoing floating volatility patterns of Bitcoin and Ethereum.

Diversification Opportunities for Bitcoin and Ethereum

0.94
  Correlation Coefficient

Almost no diversification

The 3 months correlation between Bitcoin and Ethereum is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Bitcoin and Ethereum in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ethereum and Bitcoin 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 Bitcoin are associated (or correlated) with Ethereum. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ethereum has no effect on the direction of Bitcoin i.e., Bitcoin and Ethereum go up and down completely randomly.

Pair Corralation between Bitcoin and Ethereum

Assuming the 90 days trading horizon Bitcoin is expected to generate 0.83 times more return on investment than Ethereum. However, Bitcoin is 1.21 times less risky than Ethereum. It trades about 0.05 of its potential returns per unit of risk. Ethereum is currently generating about 0.03 per unit of risk. If you would invest  3,772,538  in Bitcoin on January 22, 2024 and sell it today you would earn a total of  2,725,383  from holding Bitcoin or generate 72.24% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy100.0%
ValuesDaily Returns

Bitcoin  vs.  Ethereum

 Performance 
       Timeline  
Bitcoin 

Risk-Adjusted Performance

18 of 100

 
Weak
 
Strong
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Bitcoin are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, Bitcoin exhibited solid returns over the last few months and may actually be approaching a breakup point.
Ethereum 

Risk-Adjusted Performance

12 of 100

 
Weak
 
Strong
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Ethereum are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical indicators, Ethereum exhibited solid returns over the last few months and may actually be approaching a breakup point.

Bitcoin and Ethereum Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Bitcoin and Ethereum

The main advantage of trading using opposite Bitcoin and Ethereum positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Bitcoin position performs unexpectedly, Ethereum 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 Ethereum will offset losses from the drop in Ethereum's long position.
The idea behind Bitcoin and Ethereum 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.
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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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.

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