Correlation Between the Values of the Most Important Cryptocurrencies

Abstract

The article explores the degree of correlation between the ten most important cryptocurrencies after market capitalization in early 2020. The research focuses on a period of almost three years (from the beginning of 2017 to almost the end of 2019). We are interested in the correlation rates of cryptocurrency pairs for the entire period of their existence, with some of the cryptocurrencies, included in the survey, only appearing in the second half of 2017. Further, the article explores the differences in the correlation rates between the most important cryptocurrencies during periods of rising prices (bullish trend) and falling prices (bearish trend). In this context, we are interested in whether deviations exist, and if so, how big they are. For the analysis of correlations, we use the statistical method of Pearson's correlation coefficient, which is, in selected periods, calculated on the daily closing trading prices. The research results confirm previous researches by other authors and the
general public belief that most cryptocurrencies are strongly or at least moderately correlated. In general, alternative cryptocurrencies are more strongly correlated with each other than with Bitcoin, with some exceptions. The period of rising prices is characterized by a higher degree of correlation between Bitcoin and other cryptocurrencies relative to the average, while in the period of falling prices, the correlation is lower. All the lessons learned in the research can be used both in the planning of the cryptocurrency portfolio and in the long-term trading.