Coinbase Says Idiosyncratic Variables Still Impacting Crypto Returns

This supports the use of digital assets for portfolio diversification, the report said.

AccessTimeIconApr 13, 2022 at 12:32 p.m. UTC
Updated May 11, 2023 at 4:04 p.m. UTC
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Recently there has been a higher correlation between crypto and traditional asset classes, however, the most important variables impacting cryptocurrency returns still tend to be more idiosyncratic in nature, Coinbase said in its April outlook report.

  • This supports the use of digital assets for portfolio diversification, as the factors driving crypto performances are still distinct from those impacting traditional assets, David Duong, head of institutional research, wrote last week.
  • "Despite the convergence of geopolitical and policy-related concerns impacting almost all risk assets in recent months, our random forest analysis suggests that the return characteristics of cryptocurrencies tend to be more aligned with idiosyncratic rather than cyclical factors,” the note says.
  • Duong utilized "random forests," a machine learning algorithm that can be used to identify which variables impact cryptocurrency returns. Coinbase’s analysis shows that crypto-specific features were more relevant when explaining the returns on bitcoin (BTC), Solana’s SOL and Avalanche’s AVAX.
  • “Tokenomic-linked variables,” such as total value locked and circulating supply, were especially important for cryptocurrencies in early growth stages, such as SOL and AVAX, the report says.
  • Only ether (ETH) witnessed a rotation away from more heavily ether-centric factors in the middle of last year to more macro-driven sentiment factors in late 2021/early 2022, Coinbase said.
  • As Ethereum’s mainnet approaches "the Merge" in the second quarter, Coinbase expects a “reordering in these relationships to once again favor ether’s tokenomics,” as issuance will be reduced after the merge and staking yields should rise sharply.
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