Key Takeaways

• Crypto correlation measures the relationship between market price movements between cryptocurrencies and traditional finance assets.
• A coefficient number ranging from +1.0 (positive correlation) to -1.0 (negative correlation) is used to give insight into risk management with crypto correlation.

What is Crypto Correlation?

Crypto correlation is a mathematical calculation showing the relationship in market price movements between cryptocurrency and traditional finance assets. The technical term for the measurement is called the correlation coefficient, and it can range on a scale of +1.0 to -1.0. This means the crypto correction can either be a positive correlation, a negative correlation or no correlation.

Positive Correlation

A positive correlation between two assets means that when one asset increases in value, the other asset also tends to increase in value. Conversely, when one asset decreases in value, the other asset also tends to decrease in value.

Negative Correlation

A negative correlation between two assets means that when one asset increases in value, the other asset tends to decrease in value, and vice versa.

No Correlation

If there is no correlation between two assets, it means that changes in one asset do not affect the other asset. This can be useful for investors who want to diversify their portfolio by investing in assets with low or no correlation.

Measuring Crypto Correlation

Measuring crypto correlation requires complex calculations. Fortunately, there are several tools and platforms to help you with your calculations.

• Select your data source from trusted financial data providers, such as CoinMarketCap, CoinGecko and Bloomberg.
• Download or record historical prices for the assets you want to analyze.
• Choose your correlation method; the common ones are Pearson, Spearman or Kendall.
• Use data analysis tools like Excel, Google Sheets, Python or R to understand your correlation data and build graphs to visualize insights.

Tools for Analyzing Crypto Correlation

Several companies have prebuilt cryptocurrency trading tips and tools based on correlation. This saves you the time and complexities of data analysis, plus gives you live trading insights.

• BlockchainCenter offers an interactive crypto correlation tool that gives you the ability to compare the top coins, plus gold, and the S&P 500 to improve diversification using crypto correlation.
• DefiLlama gives you access to a Pearson coefficient for Bitcoin and altcoin correlation trends, which can also be personalized with your own data.
• Coin Metrics provides an advanced platform with multiple correlation methods.

Common Mistakes When Using Correlation in Risk Management

Using correlation offers useful insight for risk mitigation in crypto investing. However, there are several common mistakes to avoid costly pitfalls.

• Over-reliance on historical data: Analyzing crypto correlation for trading relies heavily on historical data. History, however, is no guarantee of the future — at best, it echoes.
• Ignoring market conditions: Event-driven volatility can drastically alter correlations, an ignorance of which leads to unexpected portfolio performance.
• Data misinterpretation: Inaccurate calculations or misinterpretations lead to flawed portfolio risk assessment.

Conclusion

Crypto correlation is a powerful tool for investors who want to manage their risk exposure and make informed investment decisions. By understanding how different assets correlate with each other, investors can create a well-diversified portfolio that minimizes risk and maximizes returns.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

Additional Resources

For further learning, consider the following resources:

• BlockchainCenter: Offers an interactive crypto correlation tool for comparing top coins, gold, and the S&P 500.
• DefiLlama: Provides access to a Pearson coefficient for Bitcoin and altcoin correlation trends that can be personalized with your own data.
• Coin Metrics: Offers an advanced platform with multiple correlation methods for risk management.

Did You Know?

Sir Francis Galton invented the correlation coefficient in the 1880s when he introduced the term ‘co-relation’ for the first time in scientific literature. He went on to describe his measure as the ‘index or correlation.’