Since the beginning of this year, the price of bitcoin has risen by more than 60%. However, in order to better understand the dynamics of the cryptocurrency market, it is worth looking at how their quotations have evolved in relation to BTC. It is also worth considering whether investing in cryptocurrencies could be an attractive option for an investment portfolio, in an era of increased market risk?
How closely are cryptocurrencies correlated with bitcoin?
In statistics, correlation tells us how related two variables are to each other and to what extent the dynamics of one variable affect the other. Correlation in the stock market, on the other hand, is a concept that refers to the relationship between two or more financial instruments traded on the capital market, such as shares, bonds or commodities. Correlation denotes the degree of relationship between these instruments and measures how the price movement of one instrument affects the price of the other.
There are two types of correlation: positive and negative. The former means that two financial instruments move in the same direction. In other words, when one price rises, the other also rises, and when one price falls, the other also falls. Negative correlation, on the other hand, means that two financial instruments move in opposite directions. When one rises, the other falls and vice versa.
According to CoinMarketCap, bitcoin currently accounts for 45.7% of the cryptocurrency market capitalisation. It is immediately followed by ethereum, accounting for 19.1% of the value of this market. The correlation of bitcoin to the S&P500 index (US500) has dropped from 0.52 to 0.27 over the past year. The average correlation for the largest 70 cryptocurrencies (excluding stablecoin) has dropped from 0.41 to 0.24. This means that the correlation of cryptocurrencies to the stock market, which have historically been quite significantly correlated, has dropped significantly. This may be making cryptocurrencies an asset that increasingly diversifies an investment portfolio.
Source: Conotoxia MT5, US500, Daily
The average correlation of cryptocurrencies relative to bitcoin remains constant at 0.7, indicating strong links between the two. In other words, much of the price movements in individual cryptocurrencies are linked to bitcoin's price movements - ups or downs.
What about risk in the cryptocurrency market?
One popular way to measure the risk of an investment could be the use of standard deviation. In the case of the financial market, standard deviation could be used to determine the price volatility of financial instruments, including shares. A high standard deviation implies higher price volatility and increased investment risk, which can involve significant price movements over a short period of time. Investors can use standard deviation to assess risk and choose an investment strategy. A lower standard deviation may indicate less investment risk, but also less potential for high returns.
The standard deviation of the S&P 500 has decreased from 22.7% at the beginning of the year to 17% today. At the same time, bitcoin's standard deviation decreased slightly from 63% to 55%. Similarly, the standard deviation of other cryptocurrencies was higher on average, but decreased from 96% last year to 79% today.
Source: Conotoxia MT5, BTCUSD, Daily
Grzegorz Dróżdż, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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