(Bloomberg) — Trying to pick winners and losers from the thousands of digital tokens in the nearly $2 trillion cryptocurrency market might not be worth it.
The prices of all cryptocurrencies tend to move in a similar direction and remain vulnerable to shocks overall, given that the market is highly interconnected, according to the findings of a study conducted by the Federal Reserve Bank of Chicago.
“The Connectivity Index values I calculate using different specifications, sample sizes, and time windows range from 86% to 97%,” he wrote. Filippo Ferroni, 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.”
Cryptocurrency prices have mostly fallen this year as the Fed’s rate hike and the war in Ukraine have affected investor sentiment. Bitcoin and ether are down around 20% and 10%, respectively. Few tokens withstood the downward trends as the coronavirus pandemic in 2020 and Beijing’s ban on cryptocurrencies in 2021 wreaked havoc on the crypto market.
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Price Swings in Sync
However, the study noted that a small fraction of price movements can be attributed to individual characteristics of each digital currency despite high interconnectedness.
The second largest cryptocurrency, ether, recorded a higher magnification in the last two weeks compared to bitcoin, which has been trading within a limited range for the past few months. The price of ether broke above $3,000 on Tuesday for the first time in nearly three weeks. The move is due in part to Ethereum’s technical upgrades that aim to reduce power consumption to secure the network and improve its speed and scalability.
original note:
Crypto Diversification Provides Few Benefits, Fed Study Suggests
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