Correlation Between Ethereum and Litecoin

Can any of the company-specific risk be diversified away by investing in both Ethereum and Litecoin at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Ethereum and Litecoin into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Ethereum and Litecoin, you can compare the effects of market volatilities on Ethereum and Litecoin and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Ethereum with a short position of Litecoin. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ethereum and Litecoin.

Diversification Opportunities for Ethereum and Litecoin

0.03

Correlation Coefficient

Ethereum  Litecoin

Significant diversification

The 3 months correlation between Ethereum and Litecoin is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding Ethereum and Litecoin in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Litecoin and Ethereum is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Ethereum are associated (or correlated) with Litecoin. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Litecoin has no effect on the direction of Ethereum i.e., Ethereum and Litecoin go up and down completely randomly.

Pair Corralation between Ethereum and Litecoin

Assuming the 90 days trading horizon Ethereum is expected to under-perform the Litecoin. But the crypto coin apears to be less risky and, when comparing its historical volatility, Ethereum is 1.73 times less risky than Litecoin. The crypto coin trades about -0.12 of its potential returns per unit of risk. The Litecoin is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  10,482  in Litecoin on November 28, 2024 and sell it today you would earn a total of  1,046  from holding Litecoin or generate 9.98% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Ethereum  vs.  Litecoin

Ethereum

Risk-Adjusted Performance

Very Weak

Over the last 90 days Ethereum has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Crypto's technical indicators remain rather sound which may send shares a bit higher in March 2025. The latest tumult may also be a sign of longer-term up-swing for Ethereum shareholders.

Litecoin

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Litecoin are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, Litecoin exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Ethereum and Litecoin

The main advantage of trading using opposite Ethereum and Litecoin positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Ethereum position performs unexpectedly, Litecoin can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Litecoin will offset losses from the drop in Litecoin's long position.

The idea behind Ethereum and Litecoin pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.