Weak Correlation with Tech
In Q2, BTC and ETH slightly increased their correlation with the Nasdaq 100 after a multi-year low in March. Despite this rise, they remain weakly correlated with US tech equities. The 90-day correlations are 0.16 for BTC and 0.19 for ETH, much lower than their 2022 peaks of over 0.5.
ETH Less Correlated
Since May, ETH has been less correlated to US tech equities than Bitcoin. This marks the first time since 2022 that ETH has shown a lower correlation than BTC.
Market Shifts in July
In July, US equity markets experienced a shift. Large tech stocks lost momentum while small caps gained. This rotation was driven by rising expectations of rate cuts due to weakening economic data and cooling inflation.
Portfolio Diversification
The low correlation of BTC and ETH with the Nasdaq makes them attractive portfolio diversifiers. They improve the risk-return trade-off by offering more return for similar risk. However, the introduction of spot ETFs for both BTC and ETH will prompt institutional investors to distinguish between the two assets’ unique characteristics and risks when structuring their portfolios and building their strategic asset allocations.
Investor Strategy Based on BTC and ETH Correlation
Embrace Portfolio Diversification
Given the low correlation of BTC and ETH with US tech equities, investors should use these cryptocurrencies to diversify their portfolios. This diversification can improve the risk-return trade-off, providing more return for similar risk.
Consider ETH’s Unique Position
Since May, ETH has shown even less correlation with US tech equities than BTC. Investors can take advantage of this by slightly favoring ETH over BTC when looking to diversify away from tech-heavy investments.
Monitor Market Shifts
July’s market shift, where large tech stocks lost momentum and small caps gained, suggests changing market dynamics. Investors should stay informed about macroeconomic trends and adjust their portfolios accordingly. Rising expectations of rate cuts, weakening economic data, and cooling inflation can influence these shifts.
Leverage Spot ETFs
The introduction of spot ETFs for BTC and ETH will attract institutional investors. This development means that these cryptocurrencies will be scrutinized for their unique characteristics and risks. Investors should stay updated on ETF performance and adjust their strategies to align with institutional trends.
Balance Between BTC and ETH
While both BTC and ETH provide diversification benefits, investors should balance their holdings. ETH’s recent lower correlation with tech equities suggests it might offer slightly better diversification benefits in the current market environment.
Keep an Eye on Correlation Trends
Although BTC and ETH have increased their correlation with the Nasdaq 100 slightly, they remain much lower than their 2022 peaks. Investors should monitor these correlation trends to adjust their portfolios dynamically.
Key Actions
- Diversify with BTC and ETH: Use both cryptocurrencies to improve the risk-return profile of your portfolio.
- Favor ETH Slightly: Given ETH’s recent lower correlation with tech equities, consider a slight overweight in ETH.
- Stay Informed: Keep track of macroeconomic trends and market shifts to adjust your investment strategy.
- Monitor Spot ETFs: Watch the performance of BTC and ETH spot ETFs and adjust your holdings based on institutional investment trends.
- Balance Holdings: Maintain a balanced allocation between BTC and ETH to capitalize on their unique benefits.
- Adjust Dynamically: Continuously monitor the correlation trends and adjust your portfolio to maximize diversification benefits.
