Navigating the Correlation Between Bitcoin & Altcoins for the Current Bull Market

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The cryptocurrency market appears to be in a bull run and events such as the U.S. launch of eToro could potentially extend the bull run by lowering the barriers to entry in the cryptocurrency trading market.

The fact that eToro provides an immersive and engaging UI and UX for cryptocurrency traders suggests that retail Wall Street traders might start adding crypto assets to their portfolios to deepen the mass-market adoption of cryptocurrencies.

eToro has ringside seats to the evolution of the cryptocurrency market. eToro Founder and CEO, Yoni Assia is a crypto veteran; having worked with Ethereum’s Vitalik Buterin on “Colored Coins” back in the day. Hence, it wasn’t surprising that he got an invite to join Justin Sun for a lunch with legendary investor, Warren Buffet last month.

The lunch, with a hefty price tag of a $4.57M donation to the Glide Foundation has been postponed to a future date. However, it will be money well-spent if the duo can convert the Oracle of Omaha into a believer in the prospects of cryptocurrencies.

Please Note: This is a Guest Post by Shiran Herzberg of eToro

However, the idea of turning Buffet into a crypto supporter might be a tough order because cryptocurrencies are not correlated to traditional Wall Street assets, they aren’t really subject to fundamental analysis, and their technical analysis can be messed up by wild card actions from a few whales.

Nonetheless, some interesting correlations do play out within the cryptocurrency market itself. This piece draws inferences on five noticeable patterns of correlation between Bitcoin and altcoins so that traders can make informed trading decisions as the bull market gets underway.

What is correlation?

According to Investopedia, “Correlation statistically measures the strength of a linear relationship between two relative movements of two variables and ranges from – 1 to + 1.” Interestingly, the performance of cryptocurrencies in the year-to-date period suggest that the crypto winter ended in 2018 and that the bull market has returned in 2019.

Hence, the bullish performance in Bitcoin might set the pace that other coins will emulate to kick off the altcoin season.

Bitcoin is uncorrelated with traditional assets classes such as stocks, gold, oil, or real estate. Hence, the general state of the economy doesn’t seem to particularly have a direct or inverse influence on how Bitcoin trades.

However, there are more than 2200 cryptocurrencies in the market and a every large section of those cryptocurrencies are correlated with Bitcoin. There’s truth in the saying that “When Bitcoin sneezes, most altcoins tend to catch a cold”.

Chart

Bitcoin is still the king of the crypto jungle

Bitcoin is the first, oldest, priciest, and most-popular cryptocurrency in the market. The market cap of the entire cryptocurrency market is about $335.92B and the market cap of Bitcoin alone is $211.10B.

The market cap of Bitcoin represents 62% of the market cap of the entire crypto market. The 24-hour volume of Bitcoin trade is about $22.22B while the 24-hour volume of all cryptocurrency trade is about $69.82B; representing 31% of volume of crypto traded.

In addition, the dominance of Bitcoin has increased from 51.54% in January to about 62.8% as seen in below.

Market Cap Dominance

No single pair of Altcoins is currently has negative correlation

Correlation between assets in the financial markets typically range from -1 to 0 and +1. Altcoins with correlations closer to +1 will be ranked as being positively correlated with BTC in that their prices tend to move in the direction of BTC.

Altcoins with a negative correlation close to -1 are negatively correlated to BTC is that their prices go in the opposite direction of Bitcoin. Altcoins with a correlation of 0 are uncorrelated with BTC in that the price movement is independent of the direction of Bitcoin.

However, no altcoin has displayed negative to correlation to BTC or other altcoins so far. However, some coins such as Bitcoin S.V and LINK have shown very little correlation to Bitcoin.

Altcoins with similar functions are highly correlated

When trading cryptocurrencies, you may want to pay special attention to cryptocurrencies that have similar code or altcoins that have similar functions.

For instance, Litecoin (LTC) is often regarded as the silver equivalent of Bitcoin because of the similarities in their code base. According to Binance large-cap crypto asset daily return (USD) correlation matrix for Q2 2019, Litecoin is correlated to Bitcoin at 0.69. Similarly, Monero and Dash which are both privacy-focused coins are heavily positively correlated with a 0.85 coefficient.

Likewise, Ripple (XRP) and Stellar (XLM), which are focused on global remittances are correlated with a high coefficient of 0.87.

Correlation Matrix

You can’t underrate the power of news on individual altcoins

The cryptocurrency market is still highly speculative; hence, while the general market tends to take direction from Bitcoin, individual cryptocurrencies can still show outlier performance that is detached from the performance of Bitcoin and the general crypto market.

For instance, fake news in the WeChat community suggesting that the identity of Satoshi was confirmed caused Bitcoin S.V. to moon in May.

However, the subsequent delisting of the coin on Binance and Kraken caused the coin to tank in the following week. News about Google’s plan to integrate Chainlink (LINK) into its smart contracts also caused the LINK to jump more than 75% in a single session.

If you are interested in IEOs, pay attention to the Binance Effect

Initial Exchange Offerings (IEOs) have become a popular way for crypto projects to raise funds – akin to the way many projects raised money in the 2017 ICO rush.

Of course, many people believe that IEOs are potentially more reliable that ICOs because the exchanges that facilitate them will conduct a measure of due diligence.

Successful crypto projects that launch through an IEO tend to deliver bigger price gains than existing projects – hence, IEOs are attractive for people trying to buy the “next big thing” at the lowest possible price.

So far, Binance seems to be the most popular IEO platform –inasmuch as correlation is concerned; projects have a better chance of success if they launch their IEO on Binance than on other platforms.

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