Market correlation: how cryptocurrencies move together
The cryptocurrency world has been a remarkable increase in popularity and adoption in the last decade. From Bitcoin to Ethereum and Litecoin and Monero, each cryptocurrency has its characteristics, use cases and exclusive price movements. However, despite their differences, many cryptocurrencies formed correlations, influencing each other’s prices and behavior. In this article, we will delve into the world of market correlation between cryptocurrencies and explore how they move together.
What is market correlation?
Market correlation refers to the relationship between prices of different assets or investments in a particular market. It measures to what extent two or more active tend to move together, positively (for example, when an asset rises, another asset also tends to rise) or negatively (when an asset decreases, another asset tends to go down). Market correlation can be used to identify possible investment opportunities and risks, analyzing relationships between various assets.
How cryptocurrencies move together
Cryptocurrencies formed a complex network of correlations with each other. Here are some examples:
- Bitcoin (BTC) and Ethereum (ETH)
: These two major market capitalization cryptocurrencies tend to move together, influencing each other’s prices. Bitcoin has historically been considered the cryptocurrency “creditor” due to its domain in the early days of blockchain technology, while Ethereum has become a popular platform for decentralized applications (Dapps).
- Bitcoin Cash (BCH) and Litecoin (LTC) : These two cryptocurrencies formed a correlation similar to Bitcoin and Ethereum. They tend to move together, influenced by changes in investor feeling and market interest rates.
- Monero (XMR) and Zcash (ZEC) : These two private cash alternatives formed a positive correlation with each other. When one cryptocurrency increases, the other tends to follow the example and vice versa.
- Altcoins : The widest cryptocurrency market has also seen correlations between several altcoins. For example, Bitcoin Cash is often correlated with other smaller cryptocurrencies such as dogecoin (Doge) or Verge (XVG), while ethereum -based altcoins such as EOS and Binance Smart Chain (BSC) tend to move together.
Why do cryptocurrencies correlate?
There are several reasons why cryptocurrencies correlate:
- Supply and Demand
: As more investors enter the market, prices tend to rise, leading to increased demand. On the other hand, when supply is high and demand is low, prices tend to fall.
- Volatility : The price of each cryptocurrency can be influenced by global economic conditions such as interest rates, inflation and commercial wars.
- Market feeling : Investor’s feeling, including fear and greed, can boost cryptocurrency price movements. When investors are optimistic, they tend to buy more cryptocurrencies, leading to higher prices.
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Implications for investors
Understanding market correlation between cryptocurrencies is essential for investors who want to make informed decisions about their portfolios:
- Diversification : Investing in a mixture of cryptocurrencies with different characteristics and price movements can help mitigate the risks.
- Risk Management : Cryptocurrency prices are known to be highly volatile, so investors must have a solid risk management strategy in force.
- Position Sizing : Investors should adjust their position sizes based on market correlation and the likelihood of price changes.