The Top 6 Cryptocurrencies Are Now as Correlated as the FAANGs

Top-6 crypto analysis reveals opportunities for astute investors

By Surbhi Jain Last updated Sep 13, 2018

Exclusive: Blockforce Capital on Cryptocurrency Correlations

Correlation analysis conducted on the top 6 cryptocurrencies reveals the following:

Correlation has been rising in the market for cryptocurrencies
Analysis conducted on the top 6 cryptocurrencies reveals opportunities for astute investors
Cryptocurrencies are now as correlated as the FAANGs

These, and more exclusive insights were shared by Eric Ervin, the President and CEO of Blockforce Capital (formerly Reality Shares) and David Martin, the MD for Quantitative Strategies at Blockforce Capital. Bitrazzi recently got in touch with Ervin and Martin, who shared Blockforce Capital’s stance on cryptocurrency correlations with us.

Top 6 Cryptocurrencies’ Correlation Now at 0.5

The year began with cryptocurrency market correlation at around 0.25. The current reading of 0.5 definitely marks a significant shift. “Correlation has been starting to tick up as of late, with the average correlation between top cryptocurrencies popping back above 0.5, and getting close to the 2018 high set back in June,“ Martin told Bitrazzi. Blockforce Research’s calculations are based on the top 6 cryptocurrencies, namely Bitcoin, Ethereum, Ripple, Bitcoin Cash, EOS, and Litecoin. Together, these cryptocurrencies represent 80% of the cryptocurrency market (by market capitalization).

What makes it interesting is that the FAANGs (Facebook-Amazon-Apple-Netflix-Google) correlation is about 0.54 for the past year. The top 6 cryptocurrencies are now as correlated as the FAANGs – a surprise to those who may have been assuming that the top cryptocurrencies were already as (or more) correlated than the FAANGs.

What Do Rising Cryptocurrency Correlations Imply?

Rising cryptocurrency correlations “could be a sign that people are looking for a bit of diversification within the top cryptocurrencies, allocating assets around instead of buying just one or two coins,“ noted Martin. “Its also possible that this strategy is being utilized by more institutional type investors (crypto hedge funds like the Blockforce hedge fund) that are used to this type of asset diversification.“

What Does This Mean for Crypto Investors?

While rising correlation implies market inefficiency it also sets the stage for extracting alpha. “From an investors point of view, the more correlations rise, the more inefficient markets get. These little inefficiencies create opportunities for astute investors. As an example, if all assets are falling at a similar pace, astute investors can invest more capital in the higher quality assets for better prices. This also works in reverse, where investors are able to unwind lower quality overvalued assets during rising markets. The risk is, of course, that these correlations can remain high for long periods of time, even in the most efficient markets like the S&P 500, we see intra-market correlations remain high for extended periods making it difficult for the fundamental or quantamental investor to extract alpha,” Ervin told Bitrazzi.