High-quality asset shortage, four-step analysis of whether digital assets are independent of traditional market conditions

Author: radish favorite Vitu

Source: Vitu

The annual GDP growth rate remains above 6%, while the current one-year RMB deposit rate is only 1.50%, which means that as long as the return on asset investment does not outperform the GDP growth rate, assets are depreciating.

The stock market fluctuated, and the Shanghai Stock Index has not broken 3,000 points for a long time. Bank wealth management returns are low. P2P has become a yellow flower yesterday. The rate of return on fixed income assets has fallen sharply. The price of gold is greatly affected by international economies.

Faced with a shortage of high-quality domestic assets, how can Chinese investors break the situation?

What is asset allocation?

Asset allocation is the easiest way to increase the expected returns of households and individuals without taking additional risks.

Disperse allocation among different types of assets, trying to reduce the risks while capturing the long-term returns of individual assets. On the other hand, allocating funds to various types of assets with incomplete price changes can effectively reduce systemic risks, thereby reducing the huge impact of a single asset price drop.

Generally, asset allocation is divided into the following four steps:

  • Step 1: Select investment scope
  • Step 2: Determine investment weight
  • Step 3: Select the one holding the subject
  • Step 4: Control tail risk

How to choose the investment scope?

Let's start by choosing the investment range.

As ordinary people, we can invest in asset classes including stocks, bonds, gold, commodities, cash, antiques, art, and more.

In today's economic situation where interest rates are falling, digital assets, as a new asset class, have also begun to be noticed by many people, and many people and institutions have even held them.

why? There is a reason, because of the low correlation between digital assets and stocks, bonds, and gold in traditional finance.

Let's study it.

Research Methods

We will use the Pearson correlation coefficient to measure the relationship between two asset classes.

simply put:

  • The closer the correlation coefficient is to 1 , the stronger the positive correlation. The probability that the price between two assets will go will be that you fall and I fall, and you rise and I rise, which is not conducive to asset allocation
  • The closer the correlation coefficient is to -1, the stronger the negative correlation. The probability that the price between the two assets will go is that if you fall, I can rise, spreading the risk, which is more conducive to asset allocation;

Therefore, whether the correlation is positive or negative is important for reasonable asset allocation.

data preparation

For data uniformity, we use the closing price for the entire 730 days from 2017-11-01 to 2019-10-31, and use the closing price to calculate the daily asset return rate. Finally, look at the daily return rates of different assets. Pearson correlation coefficient.

Validated assets include digital assets, stocks, bonds and gold:

Digital assets: selected top ten according to market value (excluding stablecoins)

  • Bitcoin (btc)
  • Ethereum (eth)
  • Ripple (xrp)
  • Bitcoin Cash (bch)
  • Litecoin (ltc)
  • Grapefruit coin (eos)
  • Binance Coin (bnb)
  • Stellar Coin (xlm)
  • TRON
  • Monero (xmr)

stock:

  • CSI 300 (sh300)
  • CSI 500 (sh500)
  • Hang Seng Index (hsi)
  • S & P 500 (sp500)
  • Russell 2000 (rui2000)
  • Nikkei 225 (n225)
  • German DAX Index (dax)

Bonds:

  • ChinaBond 10-year National Bond Index (bond)

gold:

  • SPDR Gold ETF Daily Price (gold)

Correlation within digital assets

Let's take a look at the daily price changes of ten digital assets.

Reference source: Vitu.ai

Let's look at the correlation between the daily price changes of ten digital assets.

Reference source: Vitu.ai

Finally, use a heat map to show that the darker the color, the better the risk spread.

Reference source: Vitu.ai

To explain briefly, the linkage between digital assets is relatively strong, which is basically a state of prosperity and loss.

Here are some more interesting points from the chart:

  • The correlation between btc and eth / ltc / xmr exceeds 0.6
  • The correlation between eth and ltc is the highest, 0.79
  • The lowest correlation between bnb and trx is 0.31 (PS: I think of the different styles of Sun Yuchen and CZ)
  • Relatively low correlation between bnb / trx and other assets
  • Relatively high correlation between eth and other assets

Correlation between digital assets and traditional financial assets

Let's take a look at the daily price changes of different asset classes in Bitcoin and traditional finance.

Reference source: Vitu.ai

Look again at their relevance.

Reference source: Vitu.ai

Finally, use a heat map to show that the darker the color, the better the risk spread.

Reference source: Vitu.ai

To explain briefly, the correlation between bitcoin and traditional financial assets is still relatively low, indicating that the market for digital assets is still very independent and not affected by the global economy.

Here are some more interesting points from the chart:

  • Weak negative correlation between btc and Nikkei 225
  • btc has weak positive correlation with global stock markets
  • btc has weak positive correlation with global stock markets
  • In traditional finance, the correlation between large-cap stocks and small-cap stocks in the United States is 0.88, and the possibility of linkage is very high.
  • In traditional finance, bonds / gold have a negative correlation with global stock markets

If you change the time parameter, or the type of digital asset, or the type of traditional financial asset, there will be different results.