Bitcoin VS Ethereum Data-Driven Analysis

With the approval of cryptocurrency ETFs by regulators, more investors are showing a growing interest in cryptocurrencies. However, many are uncertain about whether to invest in Ethereum or Bitcoin. In this article, we will provide a quantitative analysis to offer investors data-driven insights.

Returns:

• On average, Ethereum has delivered higher yearly returns compared to Bitcoin (158% vs 87%), but its returns come with significantly higher volatility—344% for Ethereum versus 163% for Bitcoin.
• Interestingly, Ethereum's median yearly return is lower at 29%, compared to Bitcoin's 37%. This indicates that 50% of the time, an investor has historically seen a yearly return of 29% or more with Ethereum, and similarly, 37% or more with Bitcoin.
• While Ethereum and Bitcoin are often thought to move in lockstep, their correlation of returns, though high, is not as strong as some might assume. The correlation stands at 78%, indicating that while their price movements are generally aligned, they do not move perfectly together.
• When it comes to the likelihood of being profitable over a one-year period, both have the same odds, at 66%.

Risk:

Historically, cryptocurrencies have been highly volatile, making them challenging for risk-averse investors. Both Ethereum and Bitcoin have experienced significant drawdowns, and they have often remained in a state of drawdown. Bitcoin's worst drawdown was a staggering -83%, occurring between 2017 and 2020, and it took 1,080 days to recover. Ethereum fared even worse, with its largest drawdown at -94%, requiring 1,116 days to fully bounce back.

Risk-Reward:

Historical analysis reveals that Bitcoin consistently outperforms Ethereum on all risk-adjusted metrics. For every unit of volatility, Bitcoin provides investors with 0.46% return, compared to Ethereum's 0.35%. Additionally, when adjusting both assets for risk, Bitcoin generates an alpha of 13.37% over Ethereum. This suggests that, historically, Bitcoin has offered a superior risk-reward profile compared to Ethereum.

Why Not Own Both?

Efficient frontier analysis shows that holding both Bitcoin and Ethereum offers diversification benefits, enhancing a portfolio's risk-reward profile by increasing the return per unit of risk. The optimal allocation, based on this analysis, is 57% Bitcoin and 43% Ethereum.
 

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