Are Cryptocurrencies Correlated to each other? And how about Gold?
We studied the top 20 crypto's from 2018-2019. Then we compared crypto and gold. Here's what we learned.
TLDR: Correlations in cryptocurrency have been all over the map. Some phases have them super correlated and in others, not so much. This makes sense as crypto is a young and maturing asset class, but we studied the daily returns over the last 15 months of the top 20 cryptos and the findings are fascinating (visualizations below).
An Analysis of Crypto Correlations
by Hemant Nemade,
Quantitative Analyst at bitsian
PS: Crypto and Gold have a strong correlation in daily price over the last 3 months
What is Correlation in Crypto?
Correlation is a statistic that measures the degree to which two securities move in relation to each other. In Crypto market, we can say that it is a measure of how crypto prices are related to each other.
Why do a Correlation Analysis?
Correlation Analysis of cryptocurrencies is a useful measure to quantify the relationship of two assets as it relates to price movement. The study of historical market data can help us better understand what correlations between assets look like -- if there is any at all.
With this insight we can use to predictively construct a portfolio of crypto assets for ourselves and clients. Insights here can help us identify:a combination of low correlated cryptos assets with others can help reduce the volatility of the overall portfolio returns.
loosely correlated cryptos to diversify to mitigate the portfolio risk.
an aggressive portfolio that might include highly correlated cryptos, all poised for a quick jump or one crypto that stands out in its growth from the rest
Exciting cryptos that were not on our radar that we can trade or share with out community to trade
This can also help us understand the market and market behavior. What people are buying, what they are not buying and to assume with context and educated guesses, what is going on and what may be ahead. This helps ask questions such as: why were alt-coins so popular in the 2017/2018 rush, but they have taken a sudden pause or a loss in the 2019 run-up, why?
Analysis of February 3rd, 2018 - July 10th, 2018
If we observe Bitcoin prices over this period, we can observe three macro trends that I have broken into phases. We chose these phases because we were curious to understand what relationships looked like at different phases or if trends and correlations persisted regardless of the phase.
Phase 1: in the first phase prices of Bitcoin are going down
Phase 2: in the second phase prices of Bitcoin are somewhat stable-lovingly called cryptowinter,
Phase 3: in the third phase Bitcoin prices are going up
Note: Each phase has volatility. Prices move up and down, but the highs and lows represent the phases.
The Data: a quick explainer
We measure relationship of cryptos with the help of a correlation coefficient. Studying the correlation we arrive at correlation coefficient which indicates the relationship of our cryptocurrencies. There are a lot of cryptos so we looked at the top 20 cryptocurrencies according to market cap. Correlation coefficients are always between -1 and 1.
Perfect negative correlation: -1, two cryptos move together, in opposite directions (ex: BTC moves up 10% and in the same time XRP moves down 10%)
Negative correlation: -1 to 0, two cryptos have somewhat of an inverse relationship (ex: sometimes BTC moves in the opposite direction of XRP, but not all the time)
No relationship: Value equals zero (0), (ex: BTC and XRP are not moving in any pattern)
Positive correlation: 0 to -1, two cryptos have somewhat of a direct relationship (ex: BTC and XRP sometime move in the same direction)
Perfect positive correlation: +1, two cryptos move together, in the same direction (ex: BTC and XRP move in the same direction)
Phase 1: February 3, 2018 to November 09, 2018
You remember that this was apart of the market run-down, right after crypto hit all time highs. We can observe a few things:
Phase 2: November 11, 2018 to March 30th, 2019
Phase 3: March 30th, 2019 - July 12, 2019
The run up starts up again, but it looks completely different than the last run up, the run down and crypto winter. In short, the market starts to break apart.
Gold and Crypto April 1, 2019-July 4, 2019
Our learnings from Gold and Crypto were very interesting. We studied the returns as well as the daily price.
Gold vs BTC, Daily Prices
Daily Price: observing the the dollar value change of gold & bitcoin in one day
BTC and Gold moved in the same direction, representing a positive correlation.
Correlation Matrix on Daily Returns
Returns: observing how much an asset changed in % value in one day
Day 1: BTC $7800 & Gold $1200
Day 2: BTC $8100 & Gold $1250 (Return: BTC 3.84%, Gold 4.16%)
Day 3: BTC $8200 & Gold $1350 (Return: BTC 1.23%, Gold is 8%)
Over the course of these three days we can observe that both BTC and Gold increase in value, but the return is different, which we can observe in the math: BTC 3.84% to 1.23 % while while Gold increases from 4.16% to 8%. The price movement is in the same direction, but the return movement is not.
We're thrilled to dive into this research. Our imperative in running quantitate analysis at bitsian comes from an eagerness to equip customers with insights and information that help them create smart, diverse and productive investments. We've also conducted research on spoof, building spoof filters and detection systems. We are currently working on how to bring quantitate analysis into the product experience for customers.
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