Bitcoin and Ether — Brothers in Spirit
Often seen as siblings and really so different…one is undoubtedly the founding father of our current crypto universe and still the leading crypto currency, the other represents the foundation for smart contracts, a new service layer based on the Internet, with almost endless application cases.
Even though both crypto tokens are very different in nature, they are often confounded as their market appreciation, and therefore price moves are very similar.
History
As we can see, Ether started its price development about four years later than Bitcoin, Bitcoin started technically in 2009, but quality price data are available since approx. 2014 (depending on data sources).
When comparing properly over the same time window, we can observe a very similar price development until mid-2021, when Ether partially decoupled from Bitcoin, however, to converge again in 2022.
Investor Perspective
Some investors have exposure to both tokens, which may create a certain sense of diversification…but is this really the case?
First, let us have a look at a 50/50 blend between Bitcoin and Ether.
As expected, the 50/50 blend (green line) stays somewhere in between both lines. Does it add any value in terms of risk reduction?
The risk/return chart shows that not only returns, but also the volatility of the 50/50 blend stays roughly in between. However, the Sharpe Ratio increases, which is due to diversification effects as the correlation between Bitcoin and Ether is slightly below 1…but this is not a real game changer!
The side effect of the high correlation (0.8) is that the 50/50 blend does not protect against major drawdowns. So, drawdown protection must be achieved by combining crypto with other asset classes (Strategic Asset Allocation SAA) and/or by using a proper tactical risk management (Tactical Asset Allocation TAA)…but this is a topic for another article.
Conclusion
Bitcoin and Ether represent approx. 75% market capitalization of the crypto token universe, which shows that market participants focus on these mature networks and their respective liquid tokens. However, this concentration is also a limiting factor from a perspective of professional investors.
True diversification in crypto can only be achieved by considering a much broader token portfolio, which requires a well-defined filter process to exclude tokens with questionable business concepts and missing liquidity.
Looking forward, we will discuss how to approach such a filter process and how a broader market exposure can create benefits for investors.
Disclaimer
This document is intended to serve as educational material only. It does not make any investment recommendations and should not be used as a basis for investment decisions. Neither 21e6 Capital nor the authors assume any responsibility for the accuracy and correctness of the included analyses.
