2021-05-02 20:00:44
Bitcoin’s Correlation with Altcoins is Declining Again. What Does it Mean?
Bitcoin (BTC) has long been accustomed to being the dominant cryptoasset, yet recently its share of the overall crypto market capitalization has declined. From standing at around 70% at the start of the year, it has since fallen below 50%, highlighting how other cryptoassets are increasingly starting to take a bigger share of recent gains.
The logical extension of this decline in dominance is that correlations between bitcoin and other coins have also begun to subside. As far back as a year ago, pretty much all the leading cryptoassets had a correlation with BTC of 0.9 and above (1 being the maximum), but in recent weeks this figure has sunk below 0.3 for many of the top-ten cryptos.
Opinion among analysts regarding this decline is mixed. While some claim it’s the temporary result of an expansionary bull market, others say that declining correlations represent a fundamental shift in the industry, as other coins beyond BTC increasingly prove their value propositions to investors.
If you rewind to the end of April 2020, ethereum (ETH), XRP, dogecoin (DOGE), and cardano (ADA) were all heavily correlated with bitcoin, at ratios of 0.95, 0.92, 0.91 and 0.95, respectively. Basically, whenever bitcoin rose or fell in price they all did the same, with their movements arguably little more than an expression of bitcoin’s performance.
As the graph below indicates, things began to change in the second half of the year.
There was a gradual subsidence up until July/August, when bitcoin (and to a lesser extent, ethereum) began rising in price, leaving many altcoins behind. Despite a recovery in correlations in October, things began to drop again from November, when bitcoin’s bull run really began picking up momentum.
Again, there was a partial recovery leading into January of this year, but correlations have been falling quite heavily since February. This is precisely when numerous altcoins began making up for lost time, rising in price as many bullish investors looked for the next big thing (now that BTC may seem a little expensive).
“The weakening correlation between major altcoins and bitcoin in a bull market is not new. As ETH and top altcoins rally during bullish spells, they often post higher returns compared to BTC, which in turn causes the correlation to drop,” said Robbie Liu, a market analyst at OKEx Insights.
Liu noted that pretty much the same phenomenon was observed during the 2017–2018 bull run. “The most notable example was in January 2018, when the correlation coefficient between BTC and ETH fell from above 0.8 to a negative value,” he told.
Nearly every analyst agrees that the drop in correlations is largely the product of the current bull market.
“In the 2017 bull market, bitcoin led the pack early on, but as investors gained confidence in the longevity of the boom, they increasingly looked to invest in smaller cryptos, which started to push those prices up faster than bitcoin's. It's the same story again in 2021,” said Glen Goodman, a cryptoasset analyst and author of The Crypto Trader.
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