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Coin Market Cap: Correlation Between Cryptocurrencies

cryptocurrency market cap

The correlation between the coins is calculated using a correlation coefficient, which shows the strength of the correlation. A correlation of +1 implies a strong correlation, correlation of -1 implies the pair will move in opposite directions and a correlation of 0 suggests no observable linear relationship.

Coin Correlation and Market Cap

For example, the coefficient between Bitcoin’s market cap and the total market cap was calculated as 0.920491. The correlation between Bitcoin market cap and Bitcoin market cap was 1.

According to Holdbot’s findings, the correlation between coins in 2019 was lower than in 2018. It points out that its research should be taken with a grain of salt. Correlations can change. Additionally, correlation does not always point to causation, especially with limited data. The data (prices and global market cap) for the calculation was collected from Coin Market Cap.

History Repeats?

In 2014,2015, and 2016 the correlation coefficient (which shows the strength of correlation) was not as high for the top 200 coins as in recent years.

2018 research showed a change. 75% of coins in the top 200 had a correlation of 0.67 or higher while 80% of coins in the top 200 had correlation of 0.8 or higher. As the market rises, most coins would rise. As it falls, most coins would fall.

When considered under the context of Bitcoin, the research found that the belief that most coins are correlated with Bitcoin was true. 75% of top 200 coins had a correlation of 0.44 or higher while 50% of the coins in the top 200 had a correlation of 0.67 or higher. Holdbot points out that the correlation between Bitcoin and the coins was weaker than the correlation between the top 200 coins and the overall market.

Top 20 Coins and Risk Diversification

The research identifies low correlation between coins such as BTC & Vechain and Ethereum Classic & NEM. It asserts that including assets with low or negative correlation in a portfolio can help to reduce overall variance and risk in the portfolio. However, many cryptocurrencies have not settled. The true nature of prices and even the reasons behind price changes vary.  Many coins are black holes for funding with no audit trails and a lot of false reports of their progress.

Fooled by Randomness

There does not appear to be enough data to conclude with 100% confidence about correlation of markets and the like. Regulatory and political pressure is likely to be one of the contributing factors to the demise of many entities. It’s too early to tell but if the tainted history of financial markets is anything to go by, a lot of coins will meet their ultimate demise. Even those with low correlation to the overall market. Behind the numbers, logos, and coins are factors which the majority do not see and will never see unless a leak or forced disclosure occurs. Nevertheless, Bitcoin is king. Ethereum is revolution.

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