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Author: Admin | 2025-04-28
Of the other coins. This brings us back to the correlation matrix in Exhibit 6 where we noted that DOGE was the most diversifying coin with an average correlation of only 25%.ConclusionCrypto has been gaining a lot of attention recently. There are many ways to obtain crypto exposure, including by investing directly in coins on centralized and decentralized exchanges, through derivative instruments like swaps and futures, and via stocks that are investing in blockchain technology.Unfortunately, it can be difficult to understand the risks of crypto assets using traditional financial risk models. For example, analyzing Bitcoin using the Two Sigma Factor Lens shows a large, idiosyncratic risk. That being said, Bitcoin was not entirely orthogonal to the factor set–there did appear to be some meaningful relationships with existing risk factors, such as positive correlations with the global equity market and the tendency for BTC to behave like an inflation sensitive asset.Of course, Bitcoin is just one coin in the crypto space. In this Street View, we explored the extent to which crypto assets are diversifying among themselves. We found that the 10 largest coins by volume are all positively correlated, with DOGE exhibiting the lowest average correlation. Given these positive correlations, we analyzed whether there are shared risks across crypto assets. A PCA also revealed that there were two major risk drivers across these coins over the past few years: long crypto (i.e., crypto beta) and unique risk of the most diversifying crypto asset in the 10-coin universe (DOGE).In summary, crypto appears to be a highly volatile, yet diversifying asset to portfolios with exposure to traditional risk factors. There does appear to be meaningful relationships among crypto assets, suggesting that a portfolio diversified across many coins might not reap massive diversification benefits.
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