• Bitcoin dominance tends to influence altcoins, with its pump or slump impacting altcoins differently.
  • Data from IntoTheBlock shows BTC’s correlation with Litecoin is stronger than with Ethereum, while Dollar-pegged USDT tails the list.
  • A lower correlation is excellent for diversification, offering trading opportunities despite broader market lull where BTC remains range-bound.

Bitcoin (BTC) price is nurturing an uptrend, and with it, several altcoins are moving north. This effect, where the price action of BTC is mirrored or reflected in the price action of another asset, is called correlation. It is often influenced by several factors, including market conditions, investor sentiment, and regulatory developments.

Outside crypto, BTC has a correlation with different assets in the financial playing field, including the US Dollar (USD) and Gold. This explains the narrative, “Bitcoin is trading like a tech stock” alongside its often acute inverse relationship with the United States dollar. Read more on this here

The correlation with TradFi assets, however, tends to show less consistency compared to crypto. Specifically, while Bitcoin’s correlation with the USD or Gold may change from time to time, it remains rather fixed for most of crypto.

Also Read: Top 3 Price Prediction Bitcoin, Ethereum, Ripple: Is BTC ready for a pullback or is it a fake out?

Bitcoin correlation with cryptocurrencies

On-chain analytics and market intelligence platform IntoTheBlock has a Bitcoin Correlation Matrix, which shows the lead crypto’s correlation with other cryptocurrencies. 

According to IntoTheBlock’s Matrix, BTC has a correlation score of 0.95 with Litecoin (LTC). This is relatively high since the highest possible is 1.00. A correlation of 1.00 means the two cryptos 100% reflect each other’s price changes. 

The lowest correlation possible is -1.00, which means the two variables, or in this case, cryptocurrencies, actually exhibit a 100% negative correlation or move in the exact opposite direction to each other. 

A result of 0 means there is no relationship whatsoever between the two variables. BTC also has a high 0.94 correlation to Ethereum (ETH).

Bitcoin correlation matrix

Smart investors tend to spread their risk by investing in different cryptocurrencies, as opposed to putting all their money in one basket. This is called ‘portfolio diversification’. It prevents investors from losing all their money in one go.

In order to achieve portfolio diversification, it is advised not to invest in highly correlated assets, because a slump affecting one will affect them all, leading to greater losses. 

For investors with large holdings of Bitcoin, therefore, it would be unwise to accumulate too much ETH or LTC. The high correlation with Litecoin is not surprising, in fact, given the altcoin is itself the product of a BTC fork. 

BTC/USDT 1-day chart, ETH/USDT 1-day chart, LTC/USDT 1-day chart

How correlation affects portfolio diversification

According to portfolio diversification theory investors should steer away from owning too many assets that share a correlation close to 1.0, Assets with a correlation that is as low as -1.0 (perfectly negatively correlated), however, yield maximum risk reduction and should be sought.

Correlation vs. Risk scale

It is not possible to find a crypto that is perfectly negatively correlated to Bitcoin. Even stablecoins, which are the least correlated, are nevertheless not negatively correlated to BTC either. The leading one, Tether (USDT), shows a 0.01 correlation. This low correlation explains why USDT tends to get attention when BTC volatility peaks.

BTC correlation with USDT

Traders use USDT to respond to the volatility of Bitcoin. When BTC price goes bearish, they sell, and because they do not want to leave the crypto market entirely, they convert their assets to USDT, before awaiting a market improvement. During such instances, it is possible to note  high volumes of USDT move from exchange wallets to private wallets.

When markets start improving, the reverse happens, with experienced traders starting to move USDT to exchange wallets in readiness to buy BTC at discounted rates.

Bitcoin, altcoins, stablecoins FAQs

What is Bitcoin?

Bitcoin is the largest cryptocurrency by market capitalization, a virtual currency designed to serve as money. This form of payment cannot be controlled by any one person, group, or entity, which eliminates the need for third-party participation during financial transactions.

What are altcoins?

Altcoins are any cryptocurrency apart from Bitcoin, but some also regard Ethereum as a non-altcoin because it is from these two cryptocurrencies that forking happens. If this is true, then Litecoin is the first altcoin, forked from the Bitcoin protocol and, therefore, an “improved” version of it.

What are stablecoins?

Stablecoins are cryptocurrencies designed to have a stable price, with their value backed by a reserve of the asset it represents. To achieve this, the value of any one stablecoin is pegged to a commodity or financial instrument, such as the US Dollar (USD), with its supply regulated by an algorithm or demand. The main goal of stablecoins is to provide an on/off-ramp for investors willing to trade and invest in cryptocurrencies. Stablecoins also allow investors to store value since cryptocurrencies, in general, are subject to volatility.

What is Bitcoin Dominance?

Bitcoin dominance is the ratio of Bitcoin's market capitalization to the total market capitalization of all cryptocurrencies combined. It provides a clear picture of Bitcoin’s interest among investors. A high BTC dominance typically happens before and during a bull run, in which investors resort to investing in relatively stable and high market capitalization cryptocurrency like Bitcoin. A drop in BTC dominance usually means that investors are moving their capital and/or profits to altcoins in a quest for higher returns, which usually triggers an explosion of altcoin rallies.


Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Join Telegram

Recommended content


Recommended Content

Editors’ Picks

Arbitrum community opens vote for 200 million ARB Gaming Catalyst Plan proposal

Arbitrum community opens vote for 200 million ARB Gaming Catalyst Plan proposal

Arbitrum community opened a vote for its Gaming Catalyst Program (GCP) to boost support for game builders in the ARB ecosystem. The plan is to strategically allocate 200 million ARB to game projects within Arbitrum. The token has sustained its gains from the week.

More Arbitrum News

ONDO extends gains by 4% with rise in non-empty wallets, hits new all-time high

ONDO extends gains by 4% with rise in non-empty wallets, hits new all-time high

Ondo extended gains by 75% increase in the past 11 days, per crypto intelligence tracker Santiment. The token ranks among top trending assets on the platform, with a massive spike in non-empty wallets. ONDO added 4% value to its price on Sunday, sustaining 40% gains from the week. 

More Ondo News

Aptos user transactions hit record high, APT eyes over 20% gains

Aptos user transactions hit record high, APT eyes over 20% gains

Aptos user transactions in a single day reached 97.488 million. The number of user transactions and Transactions Per Second, both metrics hit a record high, supporting the thesis for price gains in APT. The rise in transaction-related metrics can be attributed to Tapos, a viral clicker game where users can earn rewards. 

More Aptos News

US Presidential candidate Donald Trump is open minded to cryptocurrency, supports right to self custody

US Presidential candidate Donald Trump is open minded to cryptocurrency, supports right to self custody

US Presidential candidate Donald Trump shared positive views on crypto, posting on social media platform, “I am very positive and open minded to cryptocurrency companies and all things related to this new and burgeoning industry.” 

More Cryptocurrencies News

Bitcoin: BTC struggles, but $80K is at striking distance Premium

Bitcoin: BTC struggles, but $80K is at striking distance

Bitcoin (BTC) price is in a good position to resume the bull rally despite the recent struggle. Optimism will restart if BTC overcomes a critical hurdle and flips it into a foothold. In such a case, the pioneer crypto will be slated to push to a new all-time high (ATH). 

Read full analysis

BTC

ETH

XRP