Altcoin Prices Have Never Been More Closely Correlated with BitcoinBy Kyle Torpey
One of the main attributes of Bitcoin (BTC) is the idea that it’s an uncorrelated asset. This means it does not follow the usually ebbs and flows of the global economy. In a situation where the stock market is declining rapidly, Bitcoin may remain relatively stable or increase in price.
But what about altcoins, defined here as any cryptocurrency that isn’t Bitcoin? How correlated are these altcoins with Bitcoin? Are there any altcoins that do not move in lockstep with Bitcoin? Let’s take a closer look.
Altcoins are Highly Correlated with Bitcoin
The chart below from Coin Metrics measures the level of correlation between Bitcoin and various altcoins. As a quick explainer: altcoins that approach 1 are closely correlated with Bitcoin, altcoins around 0 are not correlated with Bitcoin, and altcoins that approach -1 are inversely correlated with Bitcoin. This measurement is known as Spearman’s rank correlation coefficient.
As we can see in the chart, all of the major altcoins generally move in the direction that Bitcoin moves. Throughout the years, there have been instances where altcoins have deviated from Bitcoin’s price movements, but those are the exception to the overall trend rather than the rule.
Obviously, there are thousands of alternative crypto tokens not included in this chart. Those smaller crypto assets are not considered here because the total value of their networks are one-twentieth or less the size of Bitcoin’s, and thus are more likely to have movements that are different from Bitcoin’s. In other words, it’s much easier for the prices of these smaller coins to have major price swings for no particular reason.
More recently, pretty much all of the major altcoins have followed Bitcoin’s lead in the ongoing bear market. As the chart shows, altcoins have never been this closely correlated to Bitcoin — at least as a whole. Of course, there is not much data to go on, as many of the most relevant altcoins today weren’t launched until 2015 or later.
Litecoin, which was launched in 2011, has been the altcoin most closely tied to bitcoin over the years. Originally pitched as the silver to bitcoin’s gold, Litecoin is now more often viewed as a testnet for features that may eventually make their way into Bitcoin. Segregated Witness (SegWit), for example, was activated on Litecoin before Bitcoin. Additionally, the developers who work on Litecoin are now interested in adding Confidential Transactions to the alternative cryptocurrency network.
So Where are the Outliers?
To obtain a crypto asset that won’t follow Bitcoin closely, you’d generally have to take on a large amount of additional risk. Small cap altcoins could be the best option, but even these assets have been closely correlated to bitcoin over the past year.
Sure, these lesser value altcoins can pop in value for no apparent reason, but they can also disappear overnight. They tend to come with additional risks in the form of susceptibility to 51% attacks, centralization, and overall legitimacy.
A recent example of a coin going against the grain is BitTorrent (BTT), which has doubled its bitcoin-denominated value in February so far. Having said that, there are also many fundamental issues with this coin that make it unlikely to function as a reliable store of value over the long term.
Outside of small cap tokens, the times altcoins have gone up in price while bitcoin was falling are generally tied to disaster scenarios or so-called “flippening” hype. A flippening is the idea that an altcoin is on the verge of overtaking bitcoin as the crypto asset with the largest market cap.
Ethereum (ETH) and Bitcoin Cash (BCH) are the two best examples here. The strongest negative correlation with Bitcoin ever recorded by a major altcoin was ETH at the end of May 2016, which was around the time that Ethereum’s The DAO was hacked. There was a lot of movement into ETH around this time in order to be part of The DAO, and then there was a lot of movement out of ETH and towards the safety of BTC once The DAO was hacked.
Additionally, BCH dipped into a negative correlation with BTC during the hype around Bitcoin’s supposed mining death spiral, which turned out to be nothing more than FUD. The basic idea was that the Bitcoin network would become unusable and everyone would start using the Bitcoin Cash network instead. Obviously, this didn’t happen, and BCH is now down around 83% against BTC from its peak.
ETH reached its peak flippening hype in June of 2017, but it did not quite break into the realm of negative correlation during that time. ETH is down around 80% against BTC since then.
If you want a crypto asset that won’t follow Bitcoin’s price movements, your main option is gambling on low-value altcoins.