Bitcoin, Ether or other token? Cryptocurrency diversification provides very few benefits, study suggests

Attempting to pick winners and losers among the thousands of digital tokens in the almost $2 trillion cryptocurrency market may not be worth your while. Prices across cryptocurrencies tend to move in a similar direction and remain sensitive to shocks as a whole, given that the market is highly interconnected, , according to the finding of a study by Federal Reserve Bank of Chicago.  

“The connectedness index values I compute using different specifications, sample sizes, and time windows range between 86% and 97%,” wrote Filippo Ferroni, a senior economist at the Chicago Fed. “From a risk-management perspective, this also suggests that it would be very difficult to create a diversified portfolio of cryptocurrencies.” 

Crypto prices have mostly dropped this year with the Fed raising rates and the Ukrainian war weighing on investor sentiment. Bitcoin and Ether have dropped around 20% and 10% respectively. Few tokens bucked the downward trends when the coronavirus pandemic in 2020 and Beijing’s crypto ban in 2021 wreaked havoc on the crypto market.  

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

The second largest cryptocurrency, Ether, saw a larger uptick in the past two weeks compared to Bitcoin, which has been range-bound for the last few months. Ether’s price topped $3000 on Tuesday for the first time in about three weeks. The move is in part due to Ethereum’s technical upgrades that aim to reduce energy consumption to secure the network and improve its speed and scalability.