The explosive rise in cryptocurrency prices in December accentuated the disparities in returns across them. According to a recent Bitwise Asset Management research study, the disparity in returns between the top- and bottom-performing currencies monitored by Bitwise’s HOLD10 Index increased to 784.9% in December. Over the course of the year, the average price gap between the top- and bottom-performing coins was 300.1%.
The analysis, titled “The Case for Diversification Within Crypto Investing,” by Bitwise, examined the price of the top ten most valued cryptocurrencies over a year, beginning in March 2017. During that time, three currencies – Ripple’s cryptocurrency XRP, Stellar’s XLM, and the Chinese token NEO – offered the highest returns to investors. They were jointly responsible for the highest returns to investors in nine of the twelve months analyzed by Bitwise. (See also: The Cryptocurrency Market’s Black Swan Risk.)
Typically, such price activity should be seen by traders as a clear buy signal. However, the inherent volatility of cryptocurrency markets renders such indications useless. For example, XRP’s May 2017 returns of 373% rapidly dropped to minus 36.1% by July. During that time, the cryptocurrency’s price plunged from $0.40 per pop to a new low of $0.15 by August.
Bitcoin Returns Didn’t Live Up to the Hype
Despite its proclivity for creating headlines owing to price volatility, bitcoin only led the list of highest returns once in July. Even then, it gave paltry returns of 15.2% (in comparison to other currencies).
“You’d anticipate Bitcoin to be on the lower end of returns as the most mature asset,” said Matt Hougan, vice president of research and development at Bitwise.
According to him, the reasons for Ripple and NEO’s success are “idiosyncratic,” as they were the result of a mix of news events, savvy marketing, and currency collaborations.
Nonetheless, the analysis claims that there is “huge heterogeneity” in the top ten cryptocurrencies’ returns and no stability in leadership. “The top coins in one month seldom stay the top coins in the next month,” according to the analysis, which argues for diversity in cryptocurrency investments.
According to Bitwise’s Matt Hougan, the vast dispersion of returns across cryptos is due to two factors. The first is that cryptocurrencies are more volatile than equities or bonds. The second reason, he claims, is that the market’s comprehension of cryptoassets exceeds that of normal investors.
“The gap between a centralized cryptocurrency like Ripple and a genuinely distributed cryptocurrency like Bitcoin is enormous,” Hougan remarked. “The market understands this, and the returns reflect this.”
There have also been reports of bitcoin’s link with other cryptocurrencies in recent years. According to Bloomberg, bitcoin’s price correlation increased when cryptocurrency markets plummeted and decreased when they climbed. However, Bitwise’s study came to a different result. “When seen holistically and in light of previous studies,” the paper says, “the correlation results clearly support the assumption that the returns of individual coins are diverse.”
Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is very dangerous and speculative, and this article is not a suggestion by Investopedia or the author to do so. Because every person’s circumstance is different, a knowledgeable specialist should always be contacted before making any financial choices. Investopedia makes no guarantees or warranties about the accuracy or timeliness of the information provided on this site. The author owns 0.01 bitcoin as of the day this post was published.
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