Crypto Diversification Provides Few Benefits, Study Suggests

According to a March 22, 2022 article written by David Pan for BNN Bloomberg News, “attempting to pick winners and losers among the thousands of digital tokens in the almost $2 trillion cryptocurrency market may not be worth your while.”

According to a study the by Federal Reserve Bank of Chicago, he says, prices across cryptocurrencies tend to move in a similar direction and remain sensitive to shocks as a whole, given that the market is highly interconnected.

“The connectedness index values I compute using different specifications, sample sizes, and time windows range between 86% and 97%,” said Filippo Ferroni, a senior economist at the Chicago Fed. “From a risk-management perspective, this also suggests that it would be very difficult to create a diversified portfolio of cryptocurrencies.”

Pan notes that crypto prices have mostly dropped this year with the Fed raising rates and the Ukrainian war weighing on investor sentiment. Bitcoin and Ether have dropped around 20% and 10% respectively. Few tokens bucked the downward trends when the coronavirus pandemic in 2020 and Beijing’s crypto ban in 2021 wreaked havoc on the crypto market.


But, he says, the study pointed out that a small fraction of price movements can be ascribed to individual characteristics of single digital currencies despite the high interconnectedness.

He also notes that the second largest cryptocurrency, Ether, saw a larger uptick in the past two weeks compared to Bitcoin, which has been range-bound for the last few months. Ether’s price topped $3000 on Tuesday for the first time in about three weeks. “The move is in part due to Ethereum’s technical upgrades that aim to reduce energy consumption to secure the network and improve its speed and scalability,” Pan wrote.  

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