Cryptocurrency Correlation: A Method of Determination
Cryptocurrencies are represented by a huge number of digital currencies, which have both similarities and radical differences from each other.
However, the enormous excitement caused by the daily introduction of new electronic money into all areas of the economy, and especially the banking sector, has led to enormous demand and, as a consequence, to incredible rates of exchange rate growth.
Now, not only forward-thinking investors are actively investing in this area, but also ordinary citizens, who can see daily that Bitcoin has reached another new high and is once again rising in price.
However, investing is a rather complex science, so it is very important to structure your portfolio in such a way that in the event of sudden market changes, you do not lose everything you have accumulated through hard work.
Correlation Method. Summary of Major Cryptocurrencies
Cryptocurrency correlation is crucial when building an investment portfolio. Correlation is defined as the similarity of price movements between completely different trading assets.
It is worth noting that correlation is measured using a coefficient, and assets can move either identically, or in completely opposite directions, or there may be no relationship at all.
If we talk about the problem of creation investment portfolio Based on cryptocurrencies, it's worth noting that all digital currencies belong to the same industry, so the impact of industry-wide news, such as problems with the exchange, can cause the price of all cryptocurrencies to collapse simultaneously.
This is why it is so important to balance a portfolio in such a way that in the event of strong market impacts, the investor can minimize their losses.
To do this, you will need to select assets in such a way that the direct relationship between their movements is minimal.
To determine correlation, there are both mathematical approaches based on lengthy calculations and three-tiered formulas, as well as ready-made solutions in the form of special indicators.
In this article, we suggest you use the iCorrelationTable indicator, which allows you to calculate the correlation coefficient not only between cryptocurrencies, but also between currency pairs, indices and even stocks.
Once you download the indicator at the end of the article, drop it into the Indicators folder inside your data directory.
After applying the indicator to the chart, a table of currencies will appear in front of you, which you need to add cryptocurrencies to by dragging their names into the table.
The correlation coefficient ranges from +1 to -1. One indicates a complete coincidence of price movements, while -1 indicates a complete opposite of asset movements (if one rises, the other falls at the same time).
So, if we rely on the data in the table generated by the iCorrelationTable indicator, we can see that the Bitcoin/Dollar currency pair has a correlation coefficient of +0.93 with the Ethereum/Dollar pair, and 0.82 with the Dash/Dollar pair.
This high correlation suggests that as Bitcoin rises or falls, Dash and Ethereum will follow the same price movement. Therefore, when trading Dash and Ethereum, Bitcoin can act as an indicator of future price movements for these assets.
When it comes to neutral cryptocurrencies that are virtually uncorrelated, the Ripple/USD and Bitcoin/USD pairs stand out. Their correlation coefficient is only 0.1, indicating a complete lack of correlation.
There is also no correlation between Monero/Dollar and Ethereum Classic/Dollar, as the correlation coefficient is only 0.02. Dash/Dollar and Ethereum Classic/Dollar move neutrally relative to each other, as their coefficient is -0.05.
In conclusion, I would like to note that the correlation of cryptocurrencies may be of interest not only to investors for the purpose of hedging risks, but also to traders who want to build their Forex strategies.
Download the iCorrelationTable correlation indicator
