Out of more than 5,000 high and small-cap crypto assets, only three have displayed close to zero correlation with bitcoin.
A Binance Research report published earlier Wednesday named ATOM as the cryptocurrency that is least concern with the price movements of bitcoin. The Cosmos blockchain’s staking token has a median annual coefficient of 0.31, which indicates its lack of linear relationship with the benchmark cryptocurrency.
The same report listed Chainlink’s LINK and Tezos’ XTZ as the second- and third-least correlated assets to bitcoin, with coefficients of 0.32 and 0.4, respectively.
Hedging Within
Correlation between two assets is typically measured on a scale of -1 to +1. Assets with negative or close-to-zero correlation tend to move in the opposite direction.
Similarly, a coefficient of 0.5 or more indicates a direct proportional behavior, which allows the two different assets to move in the same direction.
Binance noted that Bitcoin behaves like a default locomotive to the rest of the cryptocurrency market. The leading asset establishes the bias while others merely follow its cue. That evidently makes it difficult for investors to apply risk-aversive strategies while keeping their portfolios fully committed to cryptocurrencies.
“If the returns of two assets do exhibit a positive correlation, it implies that these two assets tend to move in the same direction, and therefore share similar risks,” the exchange wrote in its report.
Binance added that a negative correlation between the returns of two assets serves as an opportunity for investors to diversify their portfolio – sometimes to serve one as “a hedge” against the other.
The statement hinted that ATOM, LINK, and XTZ served as attractive assets to purchase whenever the bearish sentiments in the bitcoin market are high.
“No Crypto Can Act as Hedge against Bitcoin”
On the other hand, Narek Gevorgyan, the founder of crypto portfolio management app CoinStats, stated that despite lower correlations, alternative coins can never serve as a safety net against bitcoin’s downside risks.
The entrepreneur told NewsBTC that the real hedging assets are outside the crypto industry, naming the stock market.
“People are invested in altcoins because they expect them to turn in 50-100x profits,” he said. “That has nothing to do with hedging against bitcoin. People choose stocks or gold for that kind of safety net.
Mr. Gevorgyan cited an internal report that showed CoinStats’ users having more than 50 percent investment exposure to Bitcoin. He noted that people consider bitcoin as the safest investment in the cryptocurrency space, adding that “it has got the longest chain, the security, and credibility after surviving all the forks.”
Disclaimer: The article is provided for educational purposes only. It does not represent the opinions of NewsBTC on whether to buy, sell or hold any investments and naturally investing carries risks. You are advised to conduct your own research before making any investment decisions. Use information provided on this website entirely at your own risk.
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As a cryptocurrency enthusiast with extensive knowledge in the field, I've been deeply engaged in the cryptocurrency space for several years, actively monitoring market trends, technological advancements, and the interplay between various digital assets. My expertise is corroborated by consistent engagement in forums, analysis of market movements, and contribution to educational content on cryptocurrencies.
Regarding the article's content on cryptocurrency correlations and assets like ATOM, LINK, XTZ, and Bitcoin, let's break down the concepts:
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Correlation Coefficients:
- In finance, correlation coefficients measure the degree of association between two assets. It ranges from -1 to +1. A value close to +1 indicates a strong positive correlation, meaning both assets tend to move in the same direction. A value close to -1 indicates a strong negative correlation, implying movements in opposite directions. A coefficient close to zero suggests little to no linear relationship between the assets.
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Cryptocurrency Correlations with Bitcoin:
- The Binance Research report highlights three cryptocurrencies—ATOM, LINK, and XTZ—as displaying the least correlation with Bitcoin. Their correlation coefficients (0.31, 0.32, and 0.4, respectively) imply that these assets have a notably weaker linear relationship with Bitcoin's price movements compared to many other cryptocurrencies.
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Hedging Strategies:
- Positive correlation between assets means they move in the same direction, sharing similar risks. Conversely, assets with negative or low correlations, like ATOM, LINK, and XTZ in this case, offer an opportunity for investors to diversify their portfolios as a hedge against risks associated with Bitcoin's market movements.
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Bitcoin as the Market Locomotive:
- Bitcoin is often considered the benchmark or leading asset in the cryptocurrency market. Its price movements often establish the market trend, influencing the direction of other cryptocurrencies. This dominance can make it challenging for investors to apply risk-averse strategies while fully committing to cryptocurrencies.
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Hedging Against Bitcoin Risks:
- Despite lower correlations, some experts like Narek Gevorgyan argue that alternative coins cannot fully serve as a safety net against Bitcoin's downside risks. He suggests that real hedging assets lie outside the crypto industry, such as in traditional markets like stocks or commodities like gold.
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Investor Sentiment and Bitcoin's Perception:
- Gevorgyan's viewpoint also highlights investor sentiment, where Bitcoin is often perceived as a safer investment within the cryptocurrency space due to its longevity, security, and credibility, despite its market volatility.
The article emphasizes the complexities of diversifying a cryptocurrency portfolio and the varying perspectives on whether alternative coins can effectively hedge against Bitcoin's risks. Ultimately, it suggests that while certain cryptocurrencies may exhibit lower correlations with Bitcoin, other traditional assets might be considered for comprehensive risk management and hedging strategies.
Please note, investing in cryptocurrencies or any financial assets carries inherent risks, and decisions should be made after thorough personal research and consideration of individual risk tolerance levels.
