The world’s second largest digital currency, Ether (ETH), has been in a bull market in recent months. This week, things entered a pivotal phase with Ether’s value point just above $4,000.
As noted by cryptocurrency value tracker Coinmarketcap, Ether had a market cap of about $435 billion on May 13. Currently, Ether’s value is just about 13%, while trading volume is up 52%. While Ether’s rally began close to a year ago at the furthest point of bitcoin trading practice, its individual bull market began around January of this year.
Figure 1: Ether’s incredible rise has been full of bumps in the road
The amazing thing about this chart is that Ether’s price has seen an incredible rise in just over 2 years, from $110 on January 17, 2019, to $4,000 in April 2021, a rise of over 36 times before a recent minor setback. No traditional investment firm can match that. We certainly see an upward trend, but it’s far from linear. For example, the price of Ether has fallen more than 90% from about $1,066 in January 2018 to $107 about a year later. That’s an amazing drop in the midst of such an incredible uptrend.
Figure 2: ETH versus stocks and BTC
What is surprising in this chart is that a $1,000 investment in Ether in January 2019 grew to nearly $100,000 in April 2021 before it was withdrawn. This reminds me of the California Gold Rush of the last century. By contrast, at the top of the pyramid, only Amazon managed to break the $10,000 threshold. The S&P 500 has roughly doubled.
Another amazing thing about this chart is that all assets have increased over this period, even though many of them have declined significantly, especially before the start of the new crown pneumonia pandemic in March 2020. We should not expect all assets to rise in any given period, especially a relatively short period.
Figure 3: Volatility of Ether
Ether has not stabilized over time. Historically, risk, as measured by the standard deviation of returns, has tended to be much more stable than returns. The stock market is relatively stable compared to Ether. As Ether becomes more mature, we will likely see its volatility decline. The stock market has its upward and downward channels, but here we have a roller coaster of returns. So, burn your cash to make cash.
Figure 4: Percent return histogram for Ether (500bins)
A normal distribution, sometimes referred to as a bell curve, is a distribution that occurs naturally in many situations. For example, the bell curve can be seen on tests like the SAT and GRE. Most students will earn an average score of C, while a few will earn a B or D, and an even smaller percentage will earn an F or A. This creates a distribution that resembles the shape of a bell (hence the name). The bell curve is symmetrical. Half of the data will fall to the left of the mean; half will fall to the right.
Many groups follow this pattern. This is why it is widely used in business, statistics, and by government agencies such as the FDA, for example
The rule of thumb tells you the percentage of your data that falls within a certain standard deviation from the mean.
68% of the data fall within one standard deviation of the mean.
95% of the data fall within two standard deviations of the mean.
99.7% of the data fall within three standard deviations of the mean.
The same is true for Ether’s price variation. What is striking about this chart is that, compared to a normal distribution, Ether’s price variation is not only more concentrated around the mean, but also has a much fatter tail. With a normal distribution, about two-thirds of the observations tend to deviate +/- 1 standard deviation from the mean, while 95% of the observations tend to deviate +/- 2 standard deviations from the mean, and only 0.3% are three standard deviations from the mean as shown in the graph above.
What we see in this graph is that tail events are more prevalent than normal distributions. For example, the largest single-day drop in Ether occurred on March 12, 2020, early in the Covid-19 pandemic, with an initial drop of 45%. Stocks also fell sharply during this period, below 8 standard deviations of the average price change.
Huge price increases were more common than in normal distributions. For example, the largest single-day gain of 25.3% occurred on December 7, 2017, immediately following a huge 19.9% gain the day before.
Figure 5: Benefits and Risks of Ether (compared to FANG and Bitcoin)
This chart reflects both returns and risks. I measure the average of returns here as the compound annual growth rate or CAGR (also called the geometric mean by statisticians) or the growth rate between the starting and ending values (alternative metrics are simply the mean, average or arithmetic), which is the average return per year (in years). I use the standard deviation of returns to measure risk. I use daily price changes and convert them into annualized returns and risk metrics.
The amazing thing about this chart is that it shows how Ether is in a completely different risk-return world. We are thinking of the traditional assets in the red box in the lower left corner. A large-cap index like the S&P 500 has a long-term average annual return (including dividends) of about 10%, with an annual standard deviation of just under 20%. the 2014-2021 period is in line with these long-term averages. Individual stocks are riskier than the overall market, and the average return per FANG stock is higher than the S&P 500 over the same period (of course, not all stocks outperform the market average). Apple has a return of over 50% and a deviation of 40%, and Facebook has the same return and a lower deviation. While Ether has an incredible triple-digit average annualized return, it also shows significant risk, with an annualized standard deviation of over 100%.
Figure 6: ETH Correlation
Correlation is a statistical measure of the degree of change in the prices of two assets under similar or different circumstances. Correlations range from -1 or perfectly negative correlation to +1 or perfectly positive correlation. In a perfectly negative correlation, when the price of Asset A rises, the price of Asset B falls in the same way; versus a perfectly positive correlation, where the price of Asset A and the price of Asset B move in lockstep. From a portfolio diversification perspective, a low or even negative correlation between assets is a good thing, because the ups and downs of individual assets are somewhat smoothed out. If you choose any two stocks at random, they are likely to have a low positive correlation.
What’s surprising about this chart is how low the correlation between Ether and other asset classes is. The correlation with the S&P 500 is 0.20, which suggests that having Ether in one’s portfolio is a positive thing and helps mitigate the ups and downs of the stock market. What surprised me the most was the strong positive correlation between Ether and Bitcoin. Since Ether is a cryptocurrency, I thought there would be a positive correlation with Bitcoin, but not such a strong one.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/ethers-amazingly-high-returns-are-best-explained-by-these-6-charts/
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