Ethereum's amazingly high returns are best explained by these 6 charts

The world's second-largest digital currency, ethereum (ETH), has been on a bull run in recent months. This week, things entered a critical phase, with Ethereum's value point just above $4,000.

As noted by cryptocurrency value tracker Coinmarketcap, Ethereum had a market cap of around $435 billion on May 13. Currently, Ethereum’s value is just about 13%, while transaction volume is up 52%. While ethereum's rally began nearly a year ago when it was the farthest from bitcoin's trading routine, its individual bull run began around January of this year.

Figure 1: Ethereum’s Incredible Rise Has Been Filled with Ups and Downs

What is striking about this chart is the incredible rise in the price of Ethereum in just over 2 years, from $110 on January 17, 2019, to $4,000 in April 2021 , up more than 36 times before the most recent minor setback. No traditional investment firm can come close. We certainly see an upward trend, but it's far from a straight line. For example, the price of Ethereum fell from about $1,066 in January 2018 to $107 about a year later, a drop of more than 90%. That's a staggering drop in such an incredible uptrend.

Report: Ethereum exchange reserves will drop by more than 30% in 2022: Jinse Finance reported that according to on-chain data, investors will withdraw a large amount of Ethereum during 2022 as the Ethereum exchange reserves will drop by more than 30% in 2022 . It is reported that "exchange reserve (exchange reserve)" is a measure of the total amount of Ethereum currently stored in all centralized exchange wallets. The decline in the value of the indicator means that investors are currently moving their tokens, which indicates a sell-off. Supply is dwindling. Long-term exchange withdrawals may indicate that holders are currently accumulating, meaning they are bullish on the cryptocurrency. [2022/12/24 22:05:20]

Figure 2: ETH compared to stocks and BTC

What is surprising in this chart is that a $1,000 investment in Ethereum in January 2019 grew to nearly $100,000 in April 2021 before being withdrawn. This reminds me of the California Gold Rush of the last century. In contrast, at the top of the pyramid, only Amazon can break the $10,000 threshold. The S&P 500 roughly doubled.

zkSync releases V2 update information: adding abstract accounts and increasing compatibility with Ethereum EVM: On June 23, according to the official announcement, zkSync, a ZKRollup-based Ethereum layer-2 expansion solution, released V2 update today, and its structural changes are aimed at Improve user experience, increase compatibility with Ethereum EVM, and upgrade the performance of the zkSync v2 test network.

Among other things, the upgrade adds "Account Abstraction," which reduces the number of account types, or the number of entities that can send a transaction's ETH balance. Account abstraction enables authorization to be programmable, allowing for more diversity in wallet and protocol design and improving user experience. This upgrade also adds L2 to L1 messaging and adds support for the transaction attribute msg.value. Furthermore, the addition of L2 to L1 messages makes it possible to simplify the protocol interface and replace hard-coded operations with generic L1 interworking L2 communication.

To implement these changes, the zkSync 2.0 testnet has been reset. This means that the contract has to be redeployed, and the state of account balances and transactions has been reset. [2022/6/23 1:26:02]

Another striking thing about this chart is that all assets have increased over this time period, although many of them have fallen sharply, especially before the start of the COVID-19 pandemic in March 2020. We shouldn't expect all assets to rise in any given period, especially a relatively short one.

Data: In the last week, 587,600 new NFT assets were added to the Ethereum network: According to Jinse Finance, NFTScan data shows that in the last week, 587,693 new NFT assets were added to the Ethereum network, with an average of 83,900 new NFT assets minted every day. [2022/2/26 10:16:38]

Figure 3: Volatility in Ethereum

Ethereum has not stabilized for some time. Risk, as measured by the standard deviation of returns, has historically tended to be much more stable than returns. Compared with Ethereum, the stock market is relatively stable. As Ethereum matures, we may see its volatility decrease. The stock market has its ups and downs, but here we have a roller coaster of returns. So, spend your cash to earn cash.

The balance of the Ethereum 2.0 deposit contract address exceeded 50,000 ETH: According to OKLink data, as of 11:10 today, the current Ethereum 2.0 deposit contract address balance is 50,049 ETH, and 969 mortgage transactions of 32 ETH have been received. 9.54% of the minimum requirements for starting the Ethereum 2.0 genesis block with 524,288 ETHs have been completed [2020/11/10 12:10:50]

Figure 4: Histogram of Ethereum’s Percentage Return (500bins)

The normal distribution, sometimes called the bell curve, is a distribution that occurs naturally in many situations. For example, bell curves can be seen on tests like the SAT and GRE. Most students will receive a C average, while a minority will receive a B or D, and an even smaller percentage will receive an F or A. This creates a bell-shaped distribution (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. That's why it's widely used in business, statistics, and government agencies like the FDA, such as:

News | 32,867 unconfirmed transactions on Ethereum: According to data from Etherscan.io, the current number of unconfirmed transactions on Ethereum is 32,867. The number of unconfirmed transactions on Ethereum has dropped slightly, and overall network congestion has improved. [2019/1/7]

Person's height

Measurement error

Blood pressure

Exam Score

IQ Score

Salary

The rule of thumb tells you what percentage of your data falls within a certain standard deviation of the mean:

68% of the data fell within one standard deviation of the mean.

95% of the data fall within two standard deviations of the mean.

99.7% of the data fell within three standard deviations of the mean.

The same goes for Ethereum price changes. What is striking about this chart is that not only is the price change in Ethereum more concentrated around the mean, but it also has much fatter tails than the normal distribution. Normally distributed, about two-thirds of the observations tend to deviate from the mean +/- 1 standard deviation, while 95% of the observations tend to deviate from the mean +/- 2 standard deviations, only 0.3% as shown above , three standard deviations from the mean.

What we see in this graph is that tail events are more prevalent than normal distributions. For example, the largest single-day drop in Ethereum occurred on March 12, 2020, with an initial drop of 45% in the early days of the Covid-19 pandemic. Stocks also fell sharply during this period, below 8 standard deviations of the average price change.

Huge price increases are more common than normal distributions. For example, the largest one-day gain of 25.3% occurred on December 7, 2017, on the heels of a huge 19.9% gain the day before.

Figure 5: Returns and risks of Ethereum (compared to FANG and Bitcoin)

This chart reflects both benefits and risks. I measure returns here in terms of compound annual growth rate or CAGR (statisticians also call it the geometric mean) or the growth rate between a starting value and an ending value (alternative measures are simple average, mean or arithmetic) Average, which is the average rate of return per year (in years). I use the standard deviation of return to measure risk. I use daily price changes and convert them to annualized return and risk metrics.

What's amazing about this chart is that it shows how Ethereum is in a completely different risk-reward world. What we think of is the traditional asset 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 period 2014-2021 is consistent with these long-term averages. Individual stocks are riskier than the overall market, and the average return on each FANG stock is higher than the S&P 500 over the same period (of course, not all stocks can outperform the market average). Apple has a return of over 50% and a bias of 40%, Facebook has the same return and a lower bias. While Ethereum’s average annual return is unbelievably high in the triple digits, it also exhibits significant risk, with an annualized standard deviation of over 100%.

Figure 6: ETH Correlation

Correlation is a statistical measure of how much the prices of two assets change under similar or different circumstances. Correlations range from -1 or completely negative to +1 or completely positive. In a perfect negative correlation, when the price of asset A rises, the price of asset B also falls; in a perfect positive correlation, the price of asset A and the price of asset B move in step. From a portfolio diversification perspective, low or even negative correlations between assets is a good thing because the ups and downs of individual assets are somewhat smoothed. If you pick any two stocks at random, they will most likely have a low positive correlation.

What’s surprising about this chart is how low Ethereum’s correlation is with other asset classes. The correlation with the S&P 500 is 0.20, suggesting that owning Ethereum in one's portfolio is a positive thing that helps cushion the ups and downs of the stock market. What surprised me the most was the strong positive correlation between Ethereum and Bitcoin. Since Ethereum is an altcoin, I thought there would be a positive correlation with Bitcoin, but not such a strong correlation.

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