Previously, Qidax revealed the portfolio management for crypto assets: Bitcoin and Ethereum. It was identified that both crypto assets can be invested together with the proportion of 77:23 | BTC:ETH for maximised return while keeping minimum price volatility risk.
The recent release of the full version of Ethereum 2.0 in the market has further propelled to the question of BTC vs ETH. As Bitcoin is the first ever cryptocurrency built on blockchain technology, Bitcoin is often regarded as the pioneer and other cryptocurrency follows the price movement of Bitcoin. It is fair enough to say that, Ethereum follows Bitcoin though they are, in fact independent assets.
Cryptocurrency market sentiment is often influenced by expert forecasts or political events. Lately, Qidax analysed both crypto assets in a wider time frame, it turned out that the prices of most cryptocurrencies — especially of Ethereum could mostly depend on the market performance of Bitcoin.
The results of research conducted by our Qidax analysts from Jan.1 2020 showed that ETH had been the highest-correlated cryptocurrency to BTC in the calendar year of 2020. An average correlation coefficient of 0.9118 was found between BTC and ETH.
The question is: is it worth relying on correlation when buying cryptocurrencies? Could ETH be less correlated to BTC than is commonly believed? To find the answer, Qidax analyzed the cryptocurrency charts recently starting from early this year.
The following scaled graph shows there is similar uptrend and downtrend for BTC and ETH up to current date in 2020.
Referring to the above figure, it can be seen that BTC price is overall higher than ETH up to the first 40th days, i.e. from Jan 2020 to early Feb 2020. From 40th onwards until 75th day, there is a strong correlation between BTC and ETH prices. These two crypto assets’ prices remain highly correlated with an uptrend behaviour in the remaining days of 2020 to date.
The aforementioned observations somehow indicated that Bitcoin is the front-runner and key influencer of the crypto market, and is therefore the main trendsetter among all other crypto assets. There is a clear evidence from the cryptocurrency exchange charts showing that a decrease in the BTC price inevitably affects the exchange rate of ETH.
From the other perspective, the correlation between BTC and ETH is examined through Daily Simple Returns (refer to the earlier post for Daily Simple Returns calculation).
The comparison of the BTC and ETH Daily Simple Returns shows that some patterns of their price movements coincide over a long period of time. This correlation can be either positive or negative. A positive correlation, such as the current correlation between BTC and ETH, suggests that if the price of Bitcoin grows significantly, ETH can also increase in its value over the same period of time. However, ETH exhibits greater spikes for certain periods. This phenomenon is especially noticeable with large price fluctuations. Notably, the BTC–ETH correlation is instantaneous in most cases.
The definition of correlation in cryptocurrency
The concept of correlation in market trading refers to the phenomenon when the values of two assets move in a similar direction. However, when it comes to the cryptocurrency market, correlation may apply to all assets at once. This is particularly noticeable during the price dive on March 12 2020.
A massive Bitcoin price crash was followed by a simultaneous drop in Ethereum. From the above figure, The crypto volatilities calculated between Jan 2020 to June 2020 are 0.046696 and 0.058431 for Bitcoin and Ethereum, respectively. Ethereum is found to be more volatile than Bitcoin in the second half of the financial year.
Qidax invested heavily in Artificial Intelligence(AI) for price prediction for our crypto assets. One of our hypothesis, which works reasonably well is, Ethereum price prediction tags along with Bitcoin price prediction. If both BTC and ETH give uptrend prediction, it is very likely the market is going uptrend, vice versa. If ETH is contradicted to the BTC prediction, then the market direction is not certain. We will reveal more of our AI strategies in the future posts.
Diversification of the investment portfolio is crucial for an investor, which is usually achieved by acquiring assets with low correlation. However, in the cryptocurrency market, the change in prices of Bitcoin and Ethereum usually occurs simultaneously. Therefore, using them to diversify the investment portfolio might not make sense.
Qidax: Our solution
In this unstable market, no one can know what the correlation of cryptocurrencies will be in a year from now. Likewise, it cannot be argued that there is a complete and direct correlation between the ETH and BTC prices. Most of the time, ETH really follows BTC, but there are occasionally times when it demonstrates its independency.
Qidax aims to monitor the price fluctuation of BTC and ETH closely and produces report periodically to ensure investors manage their portfolio the best they could in expanding their wealth.
To enable accessibility and affordability for anyone to invest in crypto assets, Qidax has introduced the option to trade Qi Token — an ERC20 utility token that is representative of a portion of the total value of the Qi Index Fund. The Qi Index Fund is a crypto index fund with a portfolio constituting a basket of the top 20 cryptocurrencies on CoinMarketCap. It is the main financial product of the Qi DeFi Platform.
Qi Token is hosted on the Ethereum mainnet thus allowing for global accessibility, 24/7 trading, transparency, public verification of Qi Token holding and no expensive banking fees. The Qi Token price is linked to the value of the underlying cryptocurrencies held by the Qi Index Fund via an innovative price mechanism implemented in a smart contract. The smart contract permits the investors to cash out for their share of the underlying crypto assets anytime which means Qi Token value will be protected. The introduction of Qi Token may somewhat mitigate the crypto asset high correlation problem because such financial instruments do not correlate with the wider market.
Stay tuned for future updates.
Leave a Reply