With the rise of crypto over the past few years, much has been made about the correlation (or lack thereof) between crypto and traditional asset classes and the potential role crypto can play in helping to diversify and hedge your financial exposure elsewhere.
But what about correlation of assets within crypto itself and specifically, between Bitcoin and other crypto-assets you may be looking to invest in?
It turns out that this is an important data point to look at for various reasons. Luckily, The Crypto App offers the Price Correlation with Bitcoin metric as part of its Token Summary powered by IntoTheBlock, all found within the app’s Pro and Pro+ services.
What is Price Correlation with Bitcoin?
Price correlation with Bitcoin measures the statistical relationship between the price of Bitcoin and another cryptocurrency over 30 days. And IntoTheBlock uses Pearson’s correlation coefficient (r), which ranges from -1 to 1. The way it works is the closer the number is to 1, the stronger the relationship between the two crypto-assets’ prices, meaning that both are likely to move in the same direction in a given day.
On the other hand, correlations of 0 or near-zero suggest low or no relationship between the particular crypto-asset and Bitcoin’s price. A correlation close to -1 points to a strong negative correlation, meaning that the price of Bitcoin and the asset in question tend to move in opposite directions.
How Can I Use This Metric?
Understanding how an asset’s price moves in relation to Bitcoin’s price is helpful for investors looking to create a more diversified and even well-hedged crypto portfolio of assets. Since crypto is still a relatively new asset class, most crypto-assets tend to have a high correlation with Bitcoin. And it’s useful to track how these correlations vary over time.
In order to minimize risk, it’s often recommended to have a portfolio with low correlations between assets. This helps traders diversify their portfolio and manage their risk. Therefore, identifying crypto-assets with low or negative correlation to Bitcoin to add to one’s portfolio may prove to be good hedges in case Bitcoin’s price does not perform.
Portfolio construction and maintaining a diversified group of holdings that all don’t move in the same direction by the same degree at the same time is a key tenant of financial management in traditional asset classes. The same holds true for crypto if you are looking to build a diversified basket of crypto assets for your portfolio.
This metric, along with many others within the Crypto App’s Pro and Pro+ service offering, can help you reach that goal. Start leveraging this metric and more today with your free 7-day trial.