Crypto coins
can sometimes move together among themselves, and sometimes they can move in different directions. Generally, it is possible to say that the correlation increases when there are big movements in the market .
Bitcoin
We encounter a lot of downward or upward movements in the crypto money markets. So which altcoin has the highest correlation with bitcoin?
The correlation takes a value between -1 and 1. -1 indicates the opposite relationship, while +1 indicates the exact correlation. 0 means there is no correlation. The correlation is calculated by taking a certain period interval, and increasing or decreasing this interval can increase or decrease the correlation in direct proportion. For example, when examining
the ethereum
bitcoin correlation, it is more powerful to compare bitcoin by evaluating the correlation of bitcoin with other altcoins over the same period.
One of the mistakes made in correlation is to evaluate directly on prices. Here it is necessary to consider the correlation of prices, which consists of their returns rather than their correlation. Otherwise, erroneous conclusions may be reached. The best example of this mistake is the idea that there is a serious correlation between Google’s share values and the number of UFO sightings in the world. Of course, there is no reciprocal relationship between these two time series. The reason it is thought to be related is that both time series contain trends. For this, when examining the correlation between time series, it is more accurate to evaluate the relationship between the returns to clear the trend.
After opening the subject of correlation a little, we can explain which altcoin has a high correlation with bitcoin;
- When we look at the returns of the last two years, we see that Ethereum has a high correlation of 0.72. In the last one-year correlation, we can say that Ethereum has a value of 0.808 as the altcoin with the highest correlation.
- In the one-year window, we see that
Litecoin
, which is described as the more liquid version of bitcoin, follows Ethereum with 0.72. It is followed by
Ripple
with 0.65 and
Stellar
with 0.577.
We calculated that BAT
has the least correlation with bitcoin. So how do we evaluate all these correlation results in our investments?
When investing, correlation is an important issue for you if you are building a portfolio. If you invest in cryptocurrencies that have an inverse correlation between them, you can reduce your risk because one will increase while the other will decrease. Of course, this will also reduce your return.
Another investment method in which correlation is most commonly used is “pair trade”. Pair trade is based on the assumption that when the relationship between two highly correlated financial assets deteriorates, one will rise and the other will fall.
As a result, examining the correlations from different windows, measuring the bitcoin-altcoin relationship is a calculation that should be followed as it can have fruitful results. For a detailed understanding of the Bitcoin altcoin relationship, check out
Icrypex Quantitative Analyst Ozan Kara’s evaluation on our Medium page.
