Relationship tendencies between the U.S. market and Crypto
Cryptocurrencies such as Bitcoin and Ethereum have become global in popularity over the past five years. The possibility of use cases for these cryptoassets is still unfolding for years to come. As these exciting financial technologies move their way into the market, their place amongst other financial commodities presents a dynamic shift within the global economy, specifically, with cryptocurrency becoming a tool to hedge inflation or a safe-haven asset.
Analyzing the Stability and Correlation of Cryptocurrency with Traditional Markets: A Closer Look at Bitcoin and Ethereum Trends
Cryptocurrency is volatile in its very nature, which raises concerns about its use as a stability-focused financial instrument. As of December 2021, Bitcoin value has increased by over 5,000% in the past five years (December 2016). Ethereum, 41,800% increase in the same period. However, considering the global acceptance of cryptocurrency in the past two years, this number may not be as concerning as you might think. Given current market pressures, it seems likely that these currencies are now at a stable price relative to global economic tendencies. Crypto often tends to stake an opinion close to international market situations. Looking at the correlation coefficient between the Dow Jones Industrial Average (DJI) and Bitcoin over the past three months, it represents a number, 0.3, which indicates that Bitcoin is only slightly positively correlated to the DJI, a indicator for overall U.S. Economy strength. Looking at the same measure between the DJI and Ethereum, the correlation coefficient is 0.39, only slightly more correlated to the DJI in recent months than Bitcoin. It seems from current data and market outlooks; crypto will remain its current status as at least a part-hedge again market pressures, whether they be inflationary or something else in the macroeconomic realm.
Bitcoin and Ethereum both have a very similar correlation to the DJI, a tool for looking at its relationship to the United States Economy. Traditionally, and within the current traditional financial media, cryptocurrencies such as Bitcoin and Ethereum have been referred to together—“Bitcoin and Ethereum”, a tandem bunch that is taking the global marketplace by storm. However, looking at the relationship between Bitcoin and Ethereum provides some data that is different than popular belief. Firstly, looking at the correlation coefficient between Bitcoin and Ethereum, it is 0.6, much more correlated than the relationships between either coin’s connection to the U.S. economy.
“The 3 months correlation between Bitcoin and Ethereum is 0.6. 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” (Macroaxis.com)
With a correlation of 0.6, Bitcoin and Ethereum are positively correlated to each other. When looking at the DJI, they are less correlated to the U.S. Economy than one might think. As these assets mature, their correlation to each other and other measure is very likely to change. This early in the asset’s lifetime, making a definitive stance on their correlation is not possible.
Correlation is a major factor when curating a diversified portfolio. Diversity is a very important investing principle that will allow investors to reduce the risk of volatility from any one specific investment. In the coming years, market experts will have a clearer picture of each currency’s term and long-term trends; the question is will you find it first?
At Nimrod Yaron & Co., we serve as a professional resource for individuals and companies invested in the global marketplace. We are specifically assisting with intelligent tax planning. Contact us today to learn about all of the services we offer.
