It has long been thought that crypto currencies offer the savvy investor a hedge to other assets classes, and combined with a balanced portfolio can provide good diversification benefits. So I looked at Bitcoin, Ethereum, and BNB, and compared that to the S&P 500 index, and also the Euro
I had reliable data from 1st of October 2018, so I started the data at this date, with the cumulative returns since.
As you can see crypto's are the clear winner, but that's no surprise, BNB takes the cake on this one.
But this graph isn't terribly useful because the scale is so distorted by crypto, you can't see the S&P 500 returns.
The chart below shows the returns for each month, which gives a better feel of the correlation.
As you can see, in March 2020, cryptos and stock markets fell all together, and they also rose all together the following month. So there must be some correlation between them, at least in extreme events.
So the best measure to see how good assets are at diversifying the risks is correlation. A correlation of 1, means the assets perfectly match returns, zero means they don't have any influence, and negative means they act as a hedge, and return in opposite directions. I have calculated the correlations over the period to be as per below:
As can be seen above, cryptos have a correlation of roughly 25%, which means they provide good diversification benefits, but they do move somewhat with equity markets too. This shouldn't be surprising given the recent experience of markets during Covid.
Sources: All data is sourced form Yahoo finance, and Graphs were made using this data and MS Excel.
