By analyzing more about the correlation of prices between Bitcoin and other currencies you can incorporate these digital assets into a diversified portfolio.
Knowing how different assets correlate with each other provides a road map you can use to diversify effectively. Through correlation coefficients, you can quantify how much using one asset will offset the price movements of another.
Correlations fluctuate between +1, for absolutely positively correlated and -1, for absolutely negatively correlated.
As an example, suppose you have a very simple portfolio consisting of two stocks: ABC and XYZ. If ABC increases with a 10 percent and it’s leading to 10 percent decrease in XYZ it means that the two stocks have perfectly negatively correlation.
Bitcoin vs. Litecoin
Litecoin,which has frequently been described as the silver to Bitcoin’s gold, often demonstrates a strong correlation with the first digital currency according to a Bitcoin Market Journal analysis.
For instance in November 2013 price correlation between Litecoin and Bitcoin reached to 0.95.
Nevertheless, this correlation was disrupted more than once. An excellent example is that Litecoin did not cope with the sharp rallies of bitcoins.
There are a lot of stories when people become bitcoin millionaires, who bought in at the right time, but stories about Litecoin millionaires are less frequent.
During an interview with Forbes in 2014, Litecoin creator Charlie Lee said that “I’m sure there are Litecoin millionaires out there”. Since then, the number of investors who have reached the status of millionaires, investing in Litecoin, may have grown.
Bitcoin vs. Ether
From 2016 Ether has became the second largest digital currency by market capitalization.
In some cases these two currencies have a strong correlation and other times, the two digital currencies have no correlation at all.
The analysis shows that the correlation coefficient of Bitcoin and Ether ranges from less than 0.1 to more than 0.5.
The correlation between bitcoins and ethers on a quarterly basis ranges between -0.02 and about 0.5.
Bitcoin vs. Ether Classic
Ether Classic was invented in 2016, when the Ethereum blockchain underwent a hard fork that changed the rules of the platform. Not all users were ready to undergo the software update necessary to implement this hard fork and creators divided the network into two separate blockchains.
Just like its older brother ether, ether classic’s price relationship with bitcoin is all over the map.
From time to time, Bitcoin and Ether Classic have very low correlation, but nevertheless, the analysis shows that these two digital currency had a monthly correlation of roughly 0.6 or higher during three separate months.
Bitcoin vs. Ripple
XRP, the token of global payments network Ripple, and Bitcoin have very low correlation. Analysis shows that from April 2015 to June 2017, the correlation between Bitcoin and XRP was less than 0.2.
Summary
Knowing the correlations that exist between different digital currencies can be very useful. Armed with this information, you can form a well-diversified portfolio and increase your chances of successfully managing the price volatility of these assets. However you must always keep in mind that price of digital currencies are very unstable and price fluctuation is inevitable.
