Bitcoin, Ether or another token? Cryptocurrency Diversification Offers Very Little Benefit, Study Finds

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Trying to pick winners and losers from the thousands of digital tokens in the nearly $2 trillion cryptocurrency market may not be worth the effort.

Trying to pick winners and losers from the thousands of digital tokens in the nearly $2 trillion cryptocurrency market may not be worth the effort. Cryptocurrency prices tend to move in the same direction and remain susceptible to shocks as a whole, given that the market is highly interconnected, according to findings from a study by the Federal Reserve Bank of Chicago.

“The Connectivity Index values ​​that I calculate using different specifications, sample sizes, and time windows vary between 86% and 97%,” wrote Filippo Ferroni, senior economist at the Chicago Fed. “From a risk management perspective, this also suggests that building a diversified cryptocurrency portfolio would be very difficult.”

Crypto prices have mostly fallen this year as the Fed hikes rates and the Ukraine war weighs on investor sentiment. Bitcoin and Ether fell around 20% and 10% respectively. Few tokens withstood downtrends as the 2020 coronavirus pandemic and 2021 Beijing crypto ban wreaked havoc on the crypto market.

However, the study pointed out that a small fraction of price movements can be attributed to the individual characteristics of single digital currencies despite the strong interconnectedness.

The second largest cryptocurrency, Ether, has seen a bigger rally in the past two weeks compared to Bitcoin, which has been limited for the past few months. Ether’s price surged above $3,000 on Tuesday for the first time in about three weeks. This decision is partly due to Ethereum’s technical upgrades that aim to reduce power consumption to secure the network and improve its speed and scalability.

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