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

0.87
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Bitcoin and Ethereum is 0.87. 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 2.94 times less return on investment than Ethereum. But when comparing it to its historical volatility, Bitcoin is 1.59 times less risky than Ethereum. It trades about 0.23 of its potential returns per unit of risk. Ethereum is currently generating about 0.42 of returns per unit of risk over similar time horizon. If you would invest  119,256  in Ethereum on May 14, 2022 and sell it today you would earn a total of  73,747  from holding Ethereum or generate 61.84% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

Bitcoin  vs.  Ethereum

 Performance (%) 
       Timeline  
Bitcoin 
Bitcoin Performance
0 of 100
Over the last 90 days Bitcoin has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Crypto's basic indicators remain somewhat strong which may send shares a bit higher in September 2022. The current disturbance may also be a sign of long term up-swing for Bitcoin investors.

Bitcoin Price Channel

Ethereum 
Ethereum Performance
1 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Ethereum are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Ethereum is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Ethereum Price Channel

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.
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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.

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