Market correlation: How cryptocurrencies move together
The world of cryptocurrencies has experienced a remarkable increase in popularity and adoption over the past decade. From Bitcoin to Ethereum and Litecoin to Monero, each cryptomena has its unique properties, cases of use and prices. Despite their differences, however, many cryptocurrency has created correlations with each other and affected mutual prices and behavior. In this article, we immerse ourselves into the world of the market correlation between cryptomes and examine how they move together.
What is market correlation?
The correlation of the market concerns the relationship between the prices of various assets or investments in the market. It measures the extent to which two or more assets tend to move together, either positively (eg when one asset increases, another asset also tends to rise) or negatively (when one asset drops, another asset tends to decrease). Market correlation can be used to identify potential investment opportunities and risks by analyzing relationships between different assets.
How cryptocurrencies move together
Cryptomena created a comprehensive network of correlations to each other. Here are some examples:
- Bitcoin was historically considered a “creditor” cryptocurrency because of its dominance in the first days of blockchain technology, while Ethereum has become a popular platform for decentralized applications (DAPP).
- Bitcoin Cash (BCH) and Litecoin (LTC) : These two cryptocurrencies formed a correlation similar to the correlation of bitcoin and ethereum. They tend to move together, influenced by changes in investor sentiment and market interest rates.
3 When one cryptomena rises, the other tends to follow the suit and vice versa.
4 For example, bitcoin cash often correlates with other smaller cryptomes such as Dogecoin (Doge) or Verge (XVG), while altcoins based on Ethereum such as EOS and Binance Smart Chain (BSC) tend to move together.
Why do cryptocurrencies correlate?
There are several reasons why cryptocurrencies correlate:
- On the contrary, when the offer is high and the demand is low, prices tend to decline.
- Volatility
: The price of each cryptomena may be affected by global economic conditions such as interest rates, inflation and commercial wars.
- Market Sentiment : Sentiment investors, including fear and greed, may increase the price movements of the cryptocurrency. If investors are optimistic, they tend to buy more cryptocurrency, leading to higher prices.
- Regulatory environment : Changes in regulatory policies or frameworks may affect cryptocurrencies, which affects their correlations.
Consequences for investors
Understanding the correlation of the market between cryptomes is essential for investors who want to make informed decisions about their portfolios:
1.
- Risk Management : It is known that cryptomena prices are highly volatile, so investors should have a solid risk management strategy established.
- Size of positions : Investors should adjust their position sizes based on the correlation of the market and the likelihood of price changes.