Volatility and Correlation - A view of the past with a vision of the future


In this market article we will discuss a concept that is heard a lot in financial markets and even more in the crypto ecosystem, which are volatility and correlation.

We will see how volatile Bitcoin is making a comparison with three other crypto known as the EtherLumens and Eos. And we will also see the volatilities of traditional financial market such as Apple, the Nasdaq (index that replicates technology companies) and Dow Jones (which measures 30 of the largest publicly traded companies in the US stock market).

The correlation between the cryptos will also be discussed, and then between Bitcoin against Apple and the indices. This is a statistical measure that shows the degree of relationship between assets and whose value is in the range between 1 and -1. If its value is 1 it means that the prices of both move in the same direction, while a correlation of -1 means that the prices move in opposite directions. While its value is zero, it means that prices are not linearly related, that is, the movement of the price of one asset has no effect on the movement of the price of the other.

External Crypto Ecosystem

In this section we will see bitcoin in relation to other assets of the traditional financial market such as Apple and the Nasdaq and Dow Jones indices. It is decided to start from the outside to be able to put in context how volatile bitcoin is, and then the correlations will be seen to know if it can be related to this asset/indexes, which does not imply that the markets have a direct relationship, but the price can follow a certain behavior that having been deduced in the past we can know in the future whether to enter or leave a market or diversify in a portfolio for statistical convenience.

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Here we leave an important fact to diminish this statistical data that plays in favor of the actions and/or indices against bitcoin. All cryptocurrencies trading 365 days a year, while the traditional stock market quotes only business days that can amount to 250/2 according to certain calendars. This implies that to compare both volatilities the matrices had to be matched by putting the stock market and indexes with the price of weekends and holidays, this implies that these days the price of these assets was the same, until the new opening of next business day market which implies that these days the variation they have is 0%, lowering volatility rather compared to bitcoin that has no rest.

Following the conclusion we can see that Bitcoin alone has lowered volatility by almost 30% in these last 3 periods due to factors that we will not analyze in this note, but that the market is definitely healthier as years go by, on the other hand if we compare it with Apple we see that in 2017 they had a ratio of almost 7:1 but lowering that ratio to more than half because Apple also increased its volatility a bit by being in international markets already moved and with a lot of competition outside the US. Regarding the indices we can see that there is still a greater difference because logically what the indices do in smoothing the movements to be composed of many companies.

In the following tables we will see the correlation that Bitcoin has with these same cases:

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Here it is worth clarifying that for the analysis we will only take the green shading, the other spaces mean the same.

Here we can see that the correlation of bitcoin against Apple and the indexes always came very close to zero, being able to assume that the movement of the price of bitcoin has no effect on the movement of the price of the rest, having this same behavior throughout the last 3 years, that for more than 2019 have negative value are still very close to 0. Remember that to diversify a portfolio with 2 assets we would have to acquire two assets that have a correlation as close to -1 to reduce the global risk, which does not happen against any of the 3 cases taken, but if we see that Apple and the indexes always have a very close relationship between them, so they move in the same direction, while as we said before bitcoin against them they have no linear behavior anywhere.

Internal to the Crypto Ecosystem

In this section we will see only cryptocurrencies, within which we will analyze and compare:

  • Bitcoin
  • Ether
  • Lumens
  • Eos

 

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Here as in the conclusion we can see that not only bitcoin has lowered volatility in these last 3 years but also the whole market has lowered these intense impulses. And we can note that in this 2019 all cryptos have a similar volatility in terms of the annual data extracted from the daily variations throughout the 365 days of the year.

Next we will see the correlation that the crypto has between them:

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As in the other correlation table we will take only the shaded in green, the other value are the same.

Here we see something clear that it is that the crypto market is highly related, even with the passage of these 3 years the values have come closer and closer to 1 indicating a greater linear relationship in the same direction. Here we can conclude something not less, since at one time there were statements that argued that when bitcoin went up the altcoins went down and viceversa, since traders left one position to get into another by lowering one asset and raising the other, but obviously this is not the case, since they move in the same direction, so the conclusion is that in the last 3 years the whole market moved to the same side, when the altcoins went down under bitcoin and vice versa. Considering these past data we can assume similar behavior for the future.

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