Diversification and cryptocurrencies

For some time now, CryptoTechFin has wanted to go a step further and offer you educational and analytical content focused on investments and finance. The goal is that everyone knows how to analyze and understand the risks and benefits of their investments.


That is why from today, we are very happy to announce the launch of our Newsletter "CryptoTechFin Financial Education", which will be available on a monthly basis both on our blog and in your inbox for those of you who subscribe (if you are not already).


To inaugurate the Newsletter we have selected one of the most basic investment concepts: diversification. Today we will explain what diversification is and we will analyze whether investing in cryptocurrencies can diversify our portfolio.


What is diversification?



You have probably read or heard the famous phrase "don't put all your eggs in one basket" or "don't bet all your money on one winning horse"'. These phrases refer to one of the first and most important guidelines according to investment experts, diversification. However, not everyone gets it right. Let's see why.


As a strategy, it is often colloquially said that diversification means not putting all our assets (eggs) in the same "basket" so that, in the event of a fall, we do not lose (break) them all. By spreading your investment among different risky assets, investors can reduce their overall degree of risk without reducing their expected return. So for example if we invest only in Apple shares there is a higher risk of loss than if we invest in Apple and Google. This is because in the event of a fall in Apple there is a higher probability that Google shares will act differently and we will lose less.


However, some assets have a strong dependence on each other. For example, if tomorrow cobalt (a key material for electronic circuits) were to run out, it is very likely that both Apple and Google would suffer a sharp fall. Technology companies, food companies, energy companies, logistics companies, or any other category you can think of, tend to move in a similar way when they are affected by factors that affect the same sector.

So now the next question comes to mind,


How do we select assets to invest in so that our portfolio is truly diversified?


The mathematical answer is easy, through correlation.


In simple terms, correlation shows the degree of relationship between assets; if it is positive, the two will behave similarly, and if it is negative, they will behave in completely opposite ways. The correlation can take values between -1 and 1, where -1 is a high negative correlation, 1 is a high positive correlation and 0 is that they are not correlated at all.


Let's look at some assumptions with hypothetical Apple and Google valuations.


If Apple and Google stocks had little or no correlation, it would mean that if Apple's stock fell the probability that Google's stock would not fall or would fall much less than if they had a high correlation.





However, if Apple and Google shares had a very high correlation, if one were to fall, it would be very likely that the other would fall as well.





Finally, if their correlation were high but negative, if one of them were to fall, the other would have a high probability of rising, since they are inversely related.






As you have probably been able to deduce, when two assets have a negative or close to 0 correlation between them, it means that our investment in those assets gives us a good diversification advantage.


Does investing in cryptocurrencies help diversify my portfolio?


The next question many of you will have is whether cryptocurrencies help diversify a portfolio with "more traditional" investments.


In order to answer this question, we are going to perform an analysis in which we compare the correlation between the IBEX 35 (stock market index that mixes the 35 largest companies in the Spanish stock market) with:

  • Gold (one of the best known safe haven assets).

  • Oil (another of the most important assets).

  • Bitcoin (the most important cryptocurrency by capitalization).

  • Our StaticIndex product (based on an index algorithm of 10 cryptocurrencies selected by CryptoTechFin).


We are going to analyze which product will bring more diversification to the IBEX 35 investor based on correlation.

In the following chart we can see the evolution of asset prices in the period between March 2021 and July 2022.






These are the results of the correlation between these assets:












As we can see the two crypto products (both the StaticIndex and the Bitcoin) have much less correlation with the IBEX 25 than gold or oil, which means that it offers more diversification.



From the analysis we can conclude that Bitcoin is the asset that offers the most diversification among all, followed by the StaticIndex, gold and finally oil.


However, it is important to keep in mind that diversification is only one of the factors to consider when investing. Other key factors are profitability or risk (two factors that are highly optimized in staticIndex).



In the following articles we will analyze other factors to draw a better conclusion of the investment alternatives.





Discover all the advantages that our algorithms can offer you.

Discover our products by registering on our platform.




NOTE: StaticIndex is only available for VIP clients. If you are interested in staticIndex, please contact us at soporte@cryptotechfin.com with the subject staticIndex.





Sources:

  1. Gold price: https://finance.yahoo.com/quote/GC%3DF?p=GC%3DF

  2. Oil price: https://finance.yahoo.com/quote/CL=F/

  3. IBEX35 price: https://finance.yahoo.com/quote/%5EIBEX/

  4. Bitcoin price: https://finance.yahoo.com/quote/BTC-USD?p=BTC-USD












0 comentarios

Entradas Recientes

Ver todo