Market correlation: How cryptocurrencies move together
The world of cryptocurrencies has experienced a remarkable increase in popularity and adoption in the past ten years. From Bitcoin to Ethereum and Litecoin to Monero, every cryptocurrency has its unique properties, applications and price movements. Despite their differences, many cryptocurrencies have formed correlations that influence the prices and behavior of the other. In this article we will deal with the world of market correlation between cryptocurrencies and examine how they move together.
What is market correlation?
The market correlation refers to the relationship between the prices of different assets or investments in a specific market. It measures the extent to which two or more assets tend to move either positively (e.g. if an asset increases, another asset tends to increase) or negative (if an asset is lost, another asset tends to under)) . Market correlation can be used to identify potential investment options and risks by analyzing relationships between different assets.
How cryptocurrencies move together
Cryptocurrencies have formed a complex network of correlations. Here are some examples:
- Bitcoin (BTC) and Ethereum (ETH) : These two largest cryptocurrencies after market capitalization tends to move together and influence the other of the other. Bitcoin was historically regarded due to its dominance in the early days of blockchain technology as a “lender” cryptocurrency, while Ethereum has become a popular platform for decentralized applications (DAPPS).
- Bitcoin Cash (BCH) and Litecoin (LTC) : These two cryptocurrencies have created a similar correlation that resembles Bitcoin and Ethereum. They tend to move together, influenced by changes in investor’s mood and market interest.
- Monero (XMR) and ZCash (ZEC) : These two private meter alternatives have formed a positive correlation with each other. When a cryptocurrency increases, the other follows to follow the example and vice versa.
- Altcoins : The broader cryptocurrency market has also recorded correlations between different old coins. For example, Bitcoin-Cash often correlates with other smaller cryptocurrencies such as Dogecoin (Doge) or Versge (XVG), while Ethereum-based old coins such as EOS and Binance Smart Chain (BSC) tend to move together.
Why do cryptocurrencies correlate?
There are several reasons why cryptocurrencies correlate:
- supply and demand : If more and more investors enter the market, prices usually increase to an increased demand. Conversely, prices decrease when the supply is high and demand is low.
- Volatility
: The price of every cryptocurrency can be influenced by global economic conditions such as interest rates, inflation and trade wars.
- Market feeling : Investor feeling, including fear and greed, can drive the price movements of cryptocurrencies. If investors are optimistic, they tend to buy more cryptocurrencies, which leads to higher prices.
- Regulatory environment : Changes to the regulatory guidelines or framework conditions can affect cryptocurrency markets and influence their correlations.
Effects on investors
Understanding the market correlation between cryptocurrencies is essential for investors who want to make well -founded decisions about their portfolios:
- Diversification : Investments in a mixture of cryptocurrencies with different characteristics and price movements can help reduce risks.
- Risk management : As is known, cryptocurrency prices are very volatile, so investors should have a solid risk management strategy.
- Position size : Investors should adapt their position sizes based on the market correlation and the likelihood of price changes.