Cryptocurrency Portfolio Diversification: How Investor Education is Building a Better Ecosystem
Cryptocurrency Portfolio Diversification Gradually Shaping up As Crypto Education Reduces Market Correlation Levels
The cryptocurrency market correlation trend is slowly changing course as the crypto investors leverage portfolio diversification in this class of assets too. According to the crypto market analysts, this is an indication that more research is being done on the digital assets prior to investing.
Stats gathered from a popular crypto analysis website ‘Coincheckup’ show that short-term cryptocurrency prices exhibit more correlation than long-term price action. The daily and hourly trends have close correlations as compared to longer time spans like 1 month & 3 month trends based on the digital currency.
As of press date, only the Ripple (XRP) & Stellar (XLM) tokens had a positive price trajectory for the last 1 & 3 month time frames amongst the top 10 altcoins in market cap. IOTA, Cardano & Ethereum appear at the bottom three having lost over 40% in the past 3 months. Bitcoin has however had insignificant price changes in longer time frame chats having lost only 0.6% since the beginning of Q2.
Cryptocurrency divergence is slowly being embraced by traders whom have become more skeptical on where they put their money within the crypto markets. Digital currencies that have shown independence in price movement also suffer less from the general crypto market performance. An eToro senior analyst, Mati Greenspan, recently said that the market correlation has changed since September 2018 with the highest diversification rates so far. Mati attributed this to increased background checks as crypto becomes more common to the masses.
Since the inception of crypto markets, BTC has often dictated the market direction as most altcoins tend to replicate its price movement. Despite attracting investors due to a high risk which might result to high returns, Crypto assets are regarded as hard to HODL edging out long-term investors. The current correlation in prices has made it difficult to create a balanced crypto portfolio for risk diversification.
Mr. Greenspan has said that the crypto market diversification is higher compared to all other years due to self-education by the interested investors. Through a phone call, Mati further argued that it was the Q4 rally in 2017 that created a scenario where digital assets were highly correlated. This is because new market entrants were running for digital assets without identifying a fundamental value. Today, the market appears to be slowly self-correcting hence the difference in price action for a couple assets.
Clearly, information savvy investors are slowly dominating the crypto markets as from 2018 when the most development in blockchain tech has taken place so far. A good price action example is XLM & XRP which are both global payment oriented networks. The two assets continue to show a high price correlation while the other categories like platform & money tokens represented by ETH & BTC respectively show similar trends.
The ongoing diversification in crypto portfolio is a sign of progress according to Mati Greenspan. Therefore, it is likely that fundamental projects will be the ones to survive the ongoing market developments. Investors will probably prefer holding digital assets with better quality hence a diverse market will be a stepping stone for their survival.
However, the desired levels of diversification are yet to be achieved. This will require more resourceful educational material & experienced traders in the crypto markets. Over 2018, the number of new market entrants has reduced significantly owing to the crypto bloodbath that sliced BTC back to $7000 from the highs of $20,000. This is not to say that correlation levels might not increase again if the market rallies & investors scramble for digital assets again!
“If a lot of new people join the market, then it [price correlation] might do it again”, said Greenspan.