Truth About Crypto Price Correlation

Post Menu and Details.
  1. What is Bitcoin Dominance?
  2. Is Bitcoin The Master of Crypto Market?
  3. Why is High Crypto Price Correlation not considered reasonable?
  4. Is Correlation Permanent?
  5. Conclusion:

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Reading time: ~4 minutes

Investing in cryptocurrencies is different from investing in stock, gold, or bonds. This is because any government or central bank does not issue bitcoins or any other crypto coins. Therefore we can’t predict the prices of cryptocurrency. While we can judge other assets by inflation rates, monetary policy, and economic growth measurements, these parameters do not apply to cryptocurrency. 

The factors that influence the prices of cryptocurrencies are as follows:

  • The supply and market demand the coin.
  • The cost of the mining process required to produce that coin.
  • How the miners are rewarded for making verified transactions to the blockchain.
  • Regulations made for its sale.
  • Its internal regulatory authority.
  • The other competing cryptocurrencies.

When we analyze these factors near it seems to produce each coin with the interdependency of its price. However, most people believe that ETH and other currencies are dependent on Bitcoin. This may be because the supply and demand of all cryptocurrencies are somewhat related to the supply and demand of Bitcoin. 

To investigate the truth about crypto price correlation, we have done extensive research on the crypto market history. We have also considered experts’ opinions to get a better insight into the crypto price correlations.

What is Bitcoin Dominance?

Several factors influence the cryptocurrency market. We can say with utmost certainty that there are a lot of rumors and misinformation regarding cryptocurrency prices. An example of such misinformation is the concept of bitcoin dominance.

The Bitcoin dominance is generally referred to the Bitcoin’s percentage ownership over cryptocurrency’s total market cap. To have a correct idea about it, you may check some legitimate sites such as CoinMarketCap. 

In short, you can calculate the Bitcoin dominance by applying the formula:

Bitcoin dominance = Bitcoin Market Cap / Total Market Cap

But that is just a number; everyone dealing in cryptocurrency can quickly tell that Bitcoin dominance is much greater than this number in the cryptocurrency market, which is evident from the entire history of Bitcoin.

We have analyzed a few currencies for their correlation comparison. We can say that Litecoin, Ethereum, and Ripple have demonstrated a strong correlation with Bitcoin prices.

Is Bitcoin The Master of Crypto Market?

Now you must be thinking that is Bitcoin a key-influencer of all the cryptocurrency, and can we mark it as the leading trendsetter in the crypto market. When we closely observe the cryptocurrency exchange charts, they show that the decrease in the price of BTC reduces the exchange rates of LTC, ETH, XRP, and other coins.

Therefore, we can not ignore that most market analysts and traders believe this correlation between BTC price and other cryptocurrencies is a natural phenomenon in the digital assets market. 

Pierce Crosby’s perspective, the general manager at the financial trading charts platform TradingView, revealed in an interview with Cointelegraph. He said that the correlation between Bitcoins and everything else in the crypto market is similar to that of the correlation between the US Dollar and everything else in the equity market. Bitcoin has the largest share of the crypto market, and therefore everything is affected by its overall performance.

According to a report published by the San Francisco Open Exchange, which features cryptocurrency volatility, BTC has a much higher correlation with ETH compared with other altcoins. 

Michael van de Poppe, a member of the Amsterdam Stock Exchange and a cryptocurrency market analyst, believes that Bitcoin is the king of the cryptocurrency market. He compares the correlation with the commodity market, where gold is the determining factor in all other metals’ prices.

So, after having views from so many experts, we can conclude that Bitcoin price always impacts investors’ attitudes towards other digital currencies in the crypto market.

Why is High Crypto Price Correlation not considered reasonable?

Investors prefer acquiring assets that have a very low correlation. This is done because when one asset falls in price, the other is likely to rise. They have the opportunity to draw profit from the one which has more excellent value until they wait for the other to increase in value.

But the scenario is different in the cryptocurrency market. Most coins change their price simultaneously. According to the Binance Research study, the mean correlation between the major altcoins by capitalization was 0.7 in 2019.

After a detailed review of this study, we can conclude that the major cryptocurrencies like Ether, Litecoin, XRP, EOS, Binance Coin (BNB), Bitcoin Cash(BCH), and many others showed a correlation in the rise and fall of their values.

Therefore, if you are looking forward to diversifying your investment portfolio, investing in various coins is not a great idea. According to the expert analyst Larry Chermak, the investment portfolio can not have adequate diversification when there is excessive interdependence amongst the assets. 

Is Correlation Permanent?

Salah Eddine Bouhmidi, a financial analyst at Daily FX and IG, believes that there is not enough evidence to judge whether the crypto price correlation is negative or positive. This is because Bitcoin is the main driving force of the market. When Bitcoin starts rising, the others follow and begin escalating. Bouhmidi further advises the investors that though the correlation is a powerful tool, it is not dependable.  People should be cautious when they are dealing in the crypto market.

For establishing the crypto price correlation accurately, we will require a considerable sample size or significant database. As cryptocurrencies have a concise history and limited data, we still do not know the exact behavior of crypto coins.

Conclusion:

It is impossible to predict the real shape of crypto price correlation in the volatile crypto market after a year, a month, or even a week. However, we can not deny that there is undoubtedly a direct and complete correlation between BTC and other coins’ prices. Most of the time, various coins follow BTC, but we have also seen other coins showing independence and good results.

Thank you for reading!

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