The Correlation to BTC indicator measures the price correlation between a crypto-asset’s price and Bitcoin’s price. In statistics, it is known as the correlation coefficient (r) and at IntoTheBlock we use the most common method Pearson’s correlation, which is in linear regressions to identify the statistical relationship between two variables.
A correlation of any two variables varies between -1 and 1, with values close to -1 suggesting a high inverse relationship between the two and values close to 1 suggesting a high positive relationship. The closer the number is to 1, the stronger the relationship between the two crypto-assets’ prices; meaning that both are likely to move in the same direction in a given day.
On the other hand, correlations of 0 or near-zero suggest low or no relationship between the particular crypto-asset and Bitcoin’s price. These values can be displayed taking into account the 30- or 60-day variations in prices.
This indicator is helpful to understand how an asset’s price moves in relation to Bitcoin’s price. Since crypto is a nascent space, most assets tend to have a high correlation with Bitcoin meaning that their prices are expected to move in tandem with Bitcoin’s. This is not always the case, though, and it is useful for investors to track how these correlations vary over time.
In order to minimize risk, it is often recommended to have a portfolio with low correlations between assets. This helps traders diversify their portfolio and manage their risk. Therefore, crypto-assets with low or negative correlation to Bitcoin may be good hedges in case Bitcoin’s price does not perform.