How altcoins followed Bitcoin

Many of you have long noticed how strongly the prices of altcoins correlate with the dynamics of the BTC/USD cryptocurrency pair. Today we are looking into the reasons for such a strong “family connection”

According to CoinMarketCap, there are currently more than 1,550 different digital currencies and tokens traded on the cryptocurrency market. Cryptocurrency includes digital coins for which a special blockchain is created. And tokens, as a rule, are created on the basis of an already existing blockchain. 

All of them are designed to perform a certain type of task, therefore they differ in the mining method, encryption method, transaction speed, etc. Each altcoin has a certain credibility, which indirectly affects its value. The main question is why are cryptocurrencies so different in their characteristics so dependent on Bitcoin?

The degree of dependence of the sets X and Y is determined by the correlation coefficient cor (x,y). The formula for calculating the correlation coefficient is as follows:

The value of the correlation coefficient can range from -1 to 1. It is believed that if the correlation coefficient:

- approaches a value equal to one, then such sets have a strong direct relationship;

- are close to zero, then the relationship is weak or absent;

- with a correlation coefficient approaching -1, they say that there is a strong inverse relationship.

We compared the correlation coefficient between the price of Bitcoin and the main altcoins that are among the top ten cryptocurrencies by capitalization level. 

The first conclusionthat can be drawn is:

The couple that exhibited addiction, in most cases, was a direct addict. That is, when Bitcoin grew, the altcoin grew, and when Bitcoin fell, its decline was observed.

For clarity, we can provide graphs that allow us to evaluate the dependence of the dynamics of selected cryptocurrencies over the past few years. These results were obtained thanks to research by crypto enthusiasts conducted using Python.

It should be noted that the correlation coefficient is not constant over different time periods. According to our calculations, the correlation coefficient increases during a period of narrowing of the total volume of capitalization. And the lowest dependence can be seen during the growth of Bitcoin capitalization with a neutral news background.. 

This table shows the calculations of the correlation coefficient for the year:

However, this dependence is not a stable pattern and is very strongly influenced by fundamental news impulses.

The second featurethat could be traced was examining the correlation coefficient between bitcoin and stock indices is as follows: an inverse relationship was established between the cryptocurrency and stock market, over some time periods. That is, when stock indices fell, the capitalization of the cryptocurrency market increased with a slight time lag.

This feature confirms the statement that large investment funds that hedge possible losses from a fall in the value of securities diversify risks by investing capital from the sale of securities in cryptocurrency assets.

This feature allows us to conclude that the flow of capital from the stock market to the cryptocurrency market causes the simultaneous growth of Bitcoin and most highly liquid altcoins. And the decrease in the attractiveness of investments in cryptocurrency, due to negative news, is accompanied by an outflow of investments from the crypto market to alternative, more effective instruments for hedging risks. 

True, this theory contradicts the main principle of forming a cryptocurrency investment portfolio, which implies the selection of digital assets that have a correlation coefficient close to - 1. The inverse dependence of investment assets allows you to compensate for losses from the decline of one asset with income from the growth of another.

Therefore, the analysis of the nature of the close relationship between the dynamics of Bitcoin and other altcoins, which has recently become increasingly evident, remains only in the form of a version.