We are seeing cryptocurrencies being treated as a new asset class under the scope of investments, that even banks like Goldman Sachs has recognised it as an “asset”. To be a great investor in this asset class, it behooves each of us understanding their the price and volatility dynamics price as you can tell, that this nascent class is highly subject to narratives and its high levels of volatility is a reflection of the riskiness of the asset itself.

Let’s examine this from an investment research standpoint and see how the volatility that will affect how investment decisions of this nascent class will be. A lot of research thus far has focused on Bitcoin and used it as a benchmark for how the entire crypto market will perform, given its status as a progenitor of this class. However, how does the top crypto market (eg Ethereum, Litecoin, Dash, Ripple, etc) behave in terms return and volatility?

Researchers Palamalai and Maity (2019) employed the Vector Error Correction approach in conjunction with the Diagonal BEKK Multivariate GARCH model and they found that there were interdependencies and correlated levels of volatility amongst the different pairs of crypto markets, albeit for short periods of time.

Application for the crypto investor:

This would mean that if you, as an investor, would like to exploit such opportunities, they should be capitalised quickly instead of holding out to realise returns.

The diversification, or what we would recognise commonly in the equities market, only applies for a short timeframe within the crypto market before the perceived benefits wear out, and new narratives come into play. In the long run, there are not enough benefits in diversifying your investment portfolio from within the crypto class.

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