Cryptocurrency correlation and how it is determined

  • Jul 13 2021
  • by
  • Analyst AZA
Cryptocurrency correlation and how it is determined

Cryptocurrency correlation and how it is determined

Today, cryptocurrency assets are represented by a huge variety of digital currency units, which are both similar to each other and have radically different characteristics. But one way or another, the huge excitement, excitement, and panic, which was provoked by the regular introduction of electronic currencies in all economic sectors, in particular in the banking sector, leads to the fact that there is a huge demand, and then the quotes of cryptocurrencies begin to confidently and rather quickly increase.

Today, investing in bitcoin or other crypto assets is no surprise: not only far-sighted and wealthy investors prefer to channel their money into digital currencies, but also ordinary residents who have decided to make money on market trading. But despite all the positive aspects, investing by its nature is a very complex and multifaceted science. That is why it is extremely important for any player to form an investment portfolio so that if suddenly spontaneous reactions or market changes occur, he could secure his accumulated capital and not lose all funds. If we talk about factors, then it is the correlation that is one of the influencing parameters on the portfolio, or rather on its reliability and durability. Consequently, the correlation of digital currencies plays a huge role in the creation of such a portfolio by the depositor. This term means the identity of the price movement for different trading instruments. I would also like to emphasize that this value is measured based on special coefficients, while assets, in turn, can move in the same way or in a radically opposite way, or there are no connections at all between them.

The methodology for the formation of investment decisions and a portfolio, in particular, touches upon the problem of cryptocurrencies. All digital assets can be attributed to one area, and accordingly, the impact of news from the general sector, including difficulties with the market or similar nature, can provoke a total collapse for all crypto assets. Accordingly, a trader needs to be able to come to a balance and create his portfolio so that in the event of severe shocks in the exchange, he could minimize all potential losses. To minimize investment risks, it is important to select assets so that the direct connection between them (more precisely, their movement) is reduced to zero, well, or very minimal. To calculate the correlation, you can use both various mathematical calculations and calculations, and resort to ready-made formulas - technical solutions in the form of ready-made indicators. An indicator such as the correlation Table can be used as a tool for determining the correlation. This tool makes it possible to calculate the ratio not only between cryptocurrency assets but also between standard currency pairs, as well as securities. First, you need to download this indicator, and then install it in your terminal - in a folder called «Indicators».

Following the procedure for drawing an instrument on a chart, we will see a table of currencies, which needs to be expanded with cryptocurrencies by dragging their names into the table itself. The correlation coefficient ranges from +1 to -1. While the unit indicates the absolute coincidence of the price movement, and its minus one tells us about the borate direction of the instrument movement. The connection is as follows: if one asset goes up, the second falls accordingly. If we refer to the information provided by the table and created by the correlation indicator, then we can see that the bitcoin/dollar pair has a correlation coefficient of +0.93, like the ether/dollar pair, and the dash/dollar pair has a value of 0. 82. A high correlation coefficient indicates that an increase or, conversely, a decrease in bitcoin, dash or ether repeats the direction of the price of bitcoin itself. In other words, in trading cryptocurrencies (such as dash or ethereum), bitcoin is positioned as an indicator - a tool that is responsible for further price changes in other crypto assets.

In particular, the correlation links between digital currencies attract not only depositors intending to hedge risks, but traders who, using cryptocurrencies and their features, seek to build their trading strategies on Forex.

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Today, investing in bitcoin or other crypto assets is no surprise: not only far-sighted and wealthy investors prefer to channel their money into digital currencies, but also ordinary residents who have decided to make money on market trading.

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