The growing correlation of the crypto market

During those past two years, the cryptocurrency sector secured major partnership with mainstream players such as UBS or American Express and established itself as a key feature of the current digital revolution of the financial sector. Indeed, from Ripple partnership to the recent acceptance of the Gemini dollar by the Security and exchange commission, we can already easily predict that financial institutions will in the years to come stop experimenting and use these cryptocurrencies in order to operate massive operational cost reductions. However, for now, the crypto ecosystem remains a fairly young and volatile market prone to speculation and market manipulation.

Indeed, as points out the above figure, most of the major cryptocurrencies seems to follow the trends initiated by the bitcoin prices even though most of them have now community and proper projects impulse by major crypto players such as the Ethereum Foundation or the Ripple company. In this sense, from an investment point of view, it appears interesting to analyze through the use of Spearmans correlation Heat maps if this intuition on the correlation among the different cryptocurrencies reveals itself to be correct historically as well as in the current state of the art.

As we can see, our intuition was right. Indeed, there is an existing correlation between the different cryptocurrencies prices which only grew across the years as the sector attracted mainstream media and even more capital flowed in. However, it's also interesting to note that pairs of cryptocurrencies such as XRP/STR , BTC/LTC or ETH/ETC which are very much linked in their technology but often far aside from a philosophical standpoint tend to exhibit higher correlations showing that despite the differences of the dev teams investors tend to be the same. Moreover, we can note that the two pairs ETH/DASH and SC/STR also tends to exhibit higher correlation showing that in each case some investors hedge their portfolios between two cryptocurrencies which have not much much in common which is a little bit odd and would need further investigations in order to be able to discuss it.

To conclude, we can see that despite the overall correlation of most of the major cryptocurrencies with Bitcoin, if we want to invest on hot cryptocurrencies such as Ripple or Ethereum it could be interesting to split our portfolio between our chosen cryptocurrency and its most correlated counterparts in order to gain more in the case of a bull trend due to the price differences and the upside potential of the less expensive cryptocurrency.

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