Bitcoin is the primordial cryptocurrency, created in 2008 and released in early 2009. But

there are now thousands of cryptocurrencies (‘altcoins’), all purporting to solve various

problems. There is a large correlation between the price of all alternative tokens and the

price of Bitcoin. However, some coins are more correlated than others.

Correlation is just a technical term for similarity. So if the price of BTC appreciated 50%

in a day and the price of ETH appreciated 50% in a day, then the correlation is 1.0. If

the price of BTC depreciated 50% in a day and the price of ETH depreciated 50%, then

the correlation would be -1.

Decimal places are used between 1 and -1 to denote the correlation. Correlation is a

vital component of modern portfolio theory (‘MPT’). Investors can hedge their position

by placing a trade with an asset that is negatively correlated with another, to achieve a

neutral and more diversified position.

The vast majority of altcoins are positively correlated to the price of BTC. This means

that the price will go up when the price of BTC goes up. New coins might not be

correlated, as their price is a function of initial investment and other factors.

But as coins become bigger and more well known, the correlation tends to increase. As

per this correlation matrix from BitInfo, all of the coins listed have a correlation with

BTC, to greater or lesser degrees. A more complete list of correlations for over 2,500

coins can be found here.

The longer the timestamp, the greater the correlation. So the price correlation between

BTC against Litecoin (‘LTC’) and Ethereum (‘ETH’) might be 0.8 for a 5-year period, but

closer to 0.4 on a 3-month period. This is most likely because during 2018 and 2019

there has been something of a breakaway of the correlation.

Some altcoins do have a negative correlation to the price of BTC. REPO has a – 0.6

correlation with BTC. But this is largely because of its recent price surge in Q1 2019.

The negative correlation might even out with time, and sharp spikes during small

periods can give misleading results.

Metaverse ETP is a coin designed specifically to be negatively correlated to the price of

BTC. Negative correlation is deemed to be healthy for the market, otherwise, every

other coin will take its cue from BTC. Even a brilliant cryptocurrency network can

decline if the price of BTC plummets, for no fault of its own. Obviously, this is not an

ideal scenario.

BTC actually has a slightly negative correlation with the stock market and the precious

metals market. For this reason, it has a number of uses in terms of diversifying a

portfolio. For now, most coins have a moderate to high correlation with the price of BTC.

The higher the market cap, the more likely there is to be a strong positive correlation,

though this is a very general rule of thumb.

Daniel is a digital nomad and creative writer with a passion for distributed ledger technology and equality through technology. Primary areas of expertise include financial services and wealth management, 4IR solutions, creative writing, and cybersecurity.

October 17, 2020

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