The bullish trend is associated with the fall of that indicator. The decoupling between BTC and the market favors diversified investment
It is often said that having a cryptocurrency means having them all, as most assets generally follow Bitcoin’s moves. However, this trend has been progressively decreasing since early 2019, reaching annual minimums as the trend changes from bearish to bullish.
During 2018 it was observed that the levels of correlation between the main cryptocurrencies and Bitcoin were especially high. About 75% of the top 200 cryptocurrencies by market capitalization had an average correlation of 0.89. In early April Hodlbot said that 150 of the 200 first currencies by market capitalization had a correlation of at least 0.87 or throughout 2018.
One of the main issues among investors wanting to venture into the crypto market is the inability of their portfolios to diversify. This leads to problems for traders, since it makes it difficult to minimize risks through diversification.
Generally, when Bitcoin’s prices fall, those of other cryptocurrencies also fall. In fact, this year the market has experienced a phenomenon in which the quality of the projects generally affected the magnitude of the move but not its direction, making it extremely difficult to distinguish bad projects from good ones for those wanting to invest.
This has changed drastically in the almost two quarters of the current year, moving the average correlation coefficient of 0.89 marked in 2018 to 0.58 in 2019. Similarly, Skew, a provider of data and figures associated with the crypto market, reaffirms that the levels of correlation between the main crypto assets and Bitcoin have decreased considerably, going from a maximum of 0.92% to a minimum of 0.52% in the last 6 months. The assets BNB, XLM and XRP (0.45, 0.46 and 0.50) have been the least correlated to BTC in the last 30 days.
In late March, Binance Research reported that it had elaborated on the correlations of the cryptocurrency market in multiple periods of time in terms of yield, highlighting that the influence of the correlation is due to a variety of forces that impact the direction of the price. The exchange house also noted that the correlation coefficient between Bitcoin and several alternative currencies has been significantly reduced in the last three months.
The correlation of crypto asset returns based on BTC prices (that is, Bitcoin-adjusted returns) highlights the significantly lower correlations between crypto assets in relation to the correlations between the same currencies in USD returns.
Binance
Neither analysts nor investors welcome high levels of correlation between cryptocurrencies. This is perceived as a sign of immaturity and low market liquidity, since altcoins do not find their individuality to confront BTC and move independently. However, correlation changes over time, according to the stage of the market in which assets are active at the moment of the study.
The high levels of correlation in the market in 2018 does not imply immaturity, since in 2014, 2015 and 2016 the correlation coefficients between cryptocurrencies were not so high and the market had less capital than now.
It is the current asset cycle that can impact on these levels, since in bearish markets correlation normally contracts for prices to be directed to single moves between different cryptocurrencies. In bullish markets, prices fluctuate more independently from Bitcoin.
The increasing decrease in correlation between cryptocurrencies is a good sign for the market in general because it could generate a stream of optimism that encourages investors to diversify their portfolios among different cryptocurrencies, bringing more capital and much more liquidity to the market.
By Willmen Blanco
