New TheBlock Report Suggests Correlation Among Cryptocurrency Prices Increased in 2018
A new report released by The Block shows that virtual currencies have been highly correlated in 2018. In general, when an investor enters the virtual currency market, experts advise having a more diversified portfolio. But this might be more complicated in the virtual currency market.
As soon as Bitcoin price grows or falls, other virtual currencies follow behind. This is how the market works in general. Although there are some differences between cryptocurrencies with a clear and strong background behind with smaller cap and less developed projects, the market usually moves in the same direction.
According to the report, it is possible to see the emergence of tokenized securities to start experiencing assets in the crypto market behave without being correlated.
The correlation used ranges from -1 to 1 where 1 means perfect correlation and -1 means a negative correlation. The closer the number to zero, the less correlation there is between assets. The analyzed virtual currencies were Bitcoin (BTC), Ethereum (ETH), XRP, Bitcoin Cash (BCH), EOS, Stellar (XLM), Litecoin (LTC), Tron (TRX), Cardano (ADA), IOTA (MIOTA) and Monero (XMR).
In the table provided by the report, there are positive correlations between virtual currencies. Bitcoin and Ethereum are very correlated with other assets. Ethereum has a 74.1% overall correlation with other assets followed by Bitcoin with an overall correlation of 73%. The least correlated asset was Tron with 49.6% correlation.
The most correlated cryptocurrencies were Cardano/Stellar, followed by Bitcoin/Litecoin and Monero/Ethereum. It seems that the least correlated assets were Tron/Stellar with a correlation of 41.4%.
The report compared the results with 2017. The results were surprising since there was a correlation between these assets but the relationship was completely different. Apparently, this is due to the fact that in 2018 there was a larger trading volume and more speculation around virtual currencies.
Furthermore, the analysts show that there is also a correlation between traded volumes in different digital currencies. Bitcoin’s trading volume is the most positively correlated with other cryptocurrencies with an average correlation of 53.2%. The least correlated were Tron and Monero.
If investors are entering the space for the first time, the best thing to do is to always look at other assets to diversify a portfolio. Allocating 100% in virtual currencies is very risky. Using different virtual currencies as a way to diversify portfolio does not seem to change the overall trend of the assets. However, the least known the virtual currencies the higher the risks involved but higher the returns as well in a bull market. Bitcoin or Ethereum would work better during a bear trend compared to other ICO tokens.