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A new research paper suggests that cryptocurrency investors could use Monero to build a more efficient portfolio, covering the wild volatility that has become synonymous with the investment of digital resources looking at the correlation.
The document, entitled Analysis of conditional cross correlations of cryptocurrencies, was produced in November 2018 by three researchers from the Universitat Rovira i Virgili in Reus, in the north-west of Spain.
Nektarios Aslanidis, Aurelio F. Bariviera and Oscar Martínez-Ibañez carried out price analysis on Bitcoin, XRP, Dash and Monero between 2014 and 2018.
Their results reveal that Monero has the lowest correlation of any of the four cryptocurrencies.
Why is this important?
Well, as the document states: "A key aspect in the portfolio theory … is the correct evaluation of the correlation returns between the different activities.This metric has important implications regarding the construction of the portfolio, the analysis of the risk and coverage ".
Adverse to risk
Traditional investors will limit the risk by diversifying their assets: allocating their investments among properties, stocks, bonds or raw materials to protect themselves against losses in any sector.
In its simplest terms this is the same advice as the seventeenth century proverb: do not put all the eggs in a basket.
Cryptocurrency investors should also diversify their investments in the same way, according to the latest academic research. Investing only in Bitcoin is a sure way to increase risk, and traders can protect themselves against volatility by spreading their purchases on Ethereum, TRON, VeChain or any other successful currency.
Another way to limit the risk in your portfolio is to search for resources (stocks, bonds, cryptocurrencies, gold, etc.) With low correlations. That is, goods whose price peaks and falls are not closely related.
If you choose to buy and hold highly correlated assets – so when the price of one goes up or down, it is more likely that the price of the others goes – then there is the risk that a market crash in one sector could sweep you away .
In other words: when the king falls, even his armies.
While from September to early November 2018 there was a generally low volatility in the cryptocurrency exchange markets, the Bitcoin Cash forex of November 15 caused a sharp sell-off, dropping the price of Bitcoin to a minimum of $ 3,000.
Given that so many altcoins are so tightly linked to the price of Bitcoin, they tend to fall in price when Bitcoin does it.
The results
The researchers reviewed data from 21 May 2014 to 27 September 2018 using CoinMarketCap's daily price data. They write: "Our study finds several interesting features in the cryptocurrency ecosystem.
"On average, the correlation between cryptocurrencies is positive.Note there is low variability in all correlation pairs with Monero."
The correlation is evaluated over a range between +1 and -1. More positive numbers reflect closely linked prices while negative numbers indicate that prices tend to move in opposite directions.
Aslanidis, Bariviera and Martínez-Ibañez have found that while "the volatility of cryptocurrency raises doubts about their suitability as a store of value", the numbers show that "correlations including Monero [are] more stable over time than other correlation pairs. "
In other words, when you compare the amount that a cryptocurrency price fluctuates over time, the lowest correlations are found between Bitcoin-Monero: 0.031, XRP-Monero: 0.032 and Dash-Monero: 0.038.
The largest variance was found between XRP and Dash. The correlation ranged from +0.71 to -0.51.
The research team concludes: "Our results have important implications for portfolio analysis: An investor who builds a dynamic cryptocurrency portfolio could take into account the stable correlations involving Monero.
As amateur investors become Pro
Fund managers do not choose what to invest based on plausible insights or hypotheses. They will often use tools to find these "unrelated resources" to diversify the activities they care about, which ones they sell and which they buy.
Therefore, while this level of statistical analysis may be the responsibility of professional money managers, there is no reason why individual retail investors can not take advantage of the economic literature.
The asset collection point with a low degree of correlation is to diversify your cryptocurrency portfolio and make sure that an increase in Bitcoin prices does not put you in serious trouble.
Basically, those coins or tokens that do not fall from a cliff when Bitcoin has a bad day: these are the ones you should concentrate on collecting to diversify your wallet and protect yourself from market downturns.
And when it comes to covering volatility, this research seems to show that Monero is one of the safest bets.
