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Report Claims Bitcoin and Altcoin Correlation Slowly Fading, Could This be a Sign of a Maturing Market?

Avatar Cole Petersen 7 months ago

The volatile price action in the crypto markets over the past year and a half has proved to investors that despite each major altcoin having (mostly) unique features and use-cases, their prices are still extremely influenced by the overall market price action, and especially that of Bitcoin.

Now, a recent research report conducted and published by cryptocurrency exchange Binance gives a significant amount of insight into how correlated various cryptocurrencies are with Bitcoin, other altcoins, and the US Dollar, and highlights an interesting trend developing in the first few months of 2019 and over the past year.

Altcoin to Bitcoin Correlation Slowly Fading

The report, which was released March 20th by Binance Research, takes a deep dive into the correlations between multiple time periods and multiple cryptocurrencies in terms of returns, and highlights the “elements that may influence the strength and direction of these correlations.”

Analysts and investors alike have long viewed the notoriously high correlation between nearly all cryptocurrencies as a sign of the market’s immaturity, as only seldomly do individual altcoins move on their own accord regardless of the overall market conditions.

The report importantly notes that the correlation of returns between various altcoins and Bitcoin over the past three months has been fading significantly.

“The correlation of cryptoasset returns based on BTC prices (i.e., Bitcoin-adjusted returns), highlights significantly lower correlations among cryptoassets relative to correlations among the same coins in USD returns,” the report explains.

With this in mind, it does, in fact, appear that the 2018 Bitcoin price crash – which sent virtually all cryptocurrencies spiraling downwards – has led to a lower correlation amongst cryptocurrencies – especially in terms of monetary returns – which could mean that future price cycles (including both bull runs and bear crashes) will not cause the entire markets to move as one, with individual altcoins moving on their own accord. If this trend continues to develop, then this would be a sign of a rapidly maturing market.

Furthermore, although the Bitcoin / altcoin correlation has been fading significantly over the past three months, the trend actually started last year following the crypto market crash.

“Correlations of cryptoasset returns in BTC terms in late 2018 were much lower compared to late 2017,” the report explains.

Altcoin to USD Return Correlation Increasing 

Although most cryptos are slowly beginning to move on their own merit, separate from how Bitcoin moves, their returns in terms of USD have been gradually increasing.

“Correlation between cryptoasset returns in USD terms actually increased when comparing the same two periods,” the report explains, adding that this correlation has “coincided with the rise of stablecoins pair dominance during 2018 and is in line with the overall decline in the contribution of BTC pairs to total industry trade volume.”

The entrance of a myriad of new stable coins into the crypto markets has had an obvious effect on the market dynamics, as traders are no longer forced to trade altcoins against Bitcoin.

As more exchanges offer direct USD trading pairs, and more stable coins enter the markets, it is likely that trading altcoins against Bitcoin will become increasingly rare, which will likely perpetuate the current return decorrelation trend, which could ultimately help the markets grow in maturity and reduce the magnitude of market movements.

Featured image from Shutterstock.
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