What is crypto-correlation?

Have you ever found that some Altcoins go up as well as the Bitcoin price goes up? Likewise, when the price of Bitcoin goes down, do other Altcoins gain value too?

This appears to be quite a common trend in cryptocurrencies, and it isn’t just about Bitcoin. Many coins are associated with each other, so calculating their movements relative to each other is a good idea. A good plan for the portfolio would understand how the coins are interweaving and how their relationships influence each other.

As an investor, it is important to note that cryptocurrencies are still very much dependent on each other, though different in many ways. The market is so close-knit that you can expect other currencies to follow suit when one currency starts either going up or down.

This can, of course, be due to greater buyer confidence in the market as a whole, but it’s also because many alts follow Bitcoin’s path so closely.

Taking Advantage of the crypto correlation

An awareness of how various Cryptocurrencies respond on the market helps you to optimize portfolios and minimize exposure to Bitcoin during downturns while retaining upside throughout the bulk of a bull run.

Well-established coins with higher market caps tend to hold strong Bitcoin correlations together with lower volatility (at least in terms of insane Crypto volatility) across the entire market cycle. Meanwhile, low-mid-cap coins during bull markets appear to be used as high-risk instruments for high-reward betting but fall sharply as changes in investor sentiments.

The ideal portfolio will likely regularly re-balance between a mix of mid- and high-cap coins, weighted by metric market sentiment, while also hedging some exposure by shortening Bitcoin to create synthetic ALT / BTC pairings.

Anton Kovacic
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