In distinction to fairness markets, cryptocurrencies don’t often reveal the ‘leverage impact,’ which is a phenomenon the place an asset’s volatility is inversely associated to its returns.
The absence of this leverage impact is among the central highlights of a brand new research revealed by the specialised funding platform The Threat Protocol, which analyses cryptocurrency volatility and the statistical properties of returns for the 50 largest cryptocurrencies.
The research demonstrates that cryptocurrency returns show related ‘stylised information’ noticed in different monetary returns, however in sure situations, the behaviour of cryptocurrency is distinctively dissimilar.
The research’s main discoveries report these all through the analysis:
Lack of leveraging and different findings
Though current in fairness markets, the leverage impact fails to seem persistently in cryptocurrency, with doubtlessly vital implications. It implies that one can’t essentially hedge lengthy underlying cryptocurrency publicity by being lengthy volatility.
The research states that if the underlying cryptocurrency occurs to be one which reveals an ‘anti-leverage impact,’ such a method would basically double one’s draw back publicity as an alternative of hedging it.
Moreover, the research found that cryptocurrencies show vital calendar results, particularly, the analysis noticed distinct and protracted patterns in cryptocurrency volatility primarily based on the hour of the day and day of the week.
These have implications for crafting efficient buying and selling and funding methods centred round optimum inter and intra-day intervals for getting and promoting volatility and getting into or exiting buying and selling positions.
The research additionally factors to cryptocurrency having volatility patterns much like these of different monetary belongings, in that the magnitude of cryptocurrency returns or their volatility is strongly predictable. Nonetheless, they behave extra like equities than currencies.
The annual return correlation between BTC and the US Greenback Index reached a really vital -0.75 stage. This lends credence to the favored narrative that over an extended horizon, if the US greenback weakens, one would anticipate BTC returns to be stronger, with a unfavorable correlation to the greenback.
Cryptocurrencies exhibit acquire/loss asymmetry, that means it normally takes much less time to drop a specific amount than it takes to maneuver up by the identical quantity. Once more, that is much like equities and in distinction to currencies, which exhibit higher symmetry in up/down strikes.
Following analysis initiatives
“A main motivation for enterprise this analysis was to have the ability to reliably value sure very distinctive and complex risk-managed, decentralised, funding options created by The Threat Protocol,” explains Karamvir Gosal, the corporate’s founder and co-author of the report.
“Nonetheless, as we set about devising these options that managed directional market danger and volatility, we had been struck by how little was understood of cryptocurrency volatility,” he continues.
“When examined in any respect, it was by means of the lens of conventional finance, making the grand assumption that the underlying nature of cryptocurrency returns was much like conventional fairness market returns.
“Findings from this report have profound implications for individuals throughout the crypto ecosystem, notably danger managers, asset allocators, buyers and merchants. It’s our hope that this analysis serves to raised inform buyers and advisors about this nascent sector and offers a strong basis for additional analysis initiatives,” concludes Karamvir.