The scarcity of publicly available data has further complicated their case and has led to cryptocurrencies being correlated to a wide range of assets, none of which have yet to be widely accepted by the investor class. Many cryptocurrencies also lack a clear enough use case in economics or financial accounting for many investors to develop a cogent thesis around them. Not enough time has elapsed to establish predictable patterns of behavior between cryptocurrencies and traditional asset classes. But because cryptocurrencies are such a new asset class, it’s difficult to establish the correlation of cryptocurrencies to other assets within the broader economy. The correlation theory works in part because it establishes a statistical relationship between different assets in an economy. As such, price movements for cryptocurrencies have not always followed a predictable pattern and can swing with investor whims. crypto markets, retail investors dominated the crypto trading ecosystem, but they lacked the heft and trading volume of institutional investors. Correlation Between Cryptocurrencies and Traditional AssetsĮarly on in U.S. Investors often use gold and other non-correlated assets as a safe haven against economic turmoil. For example, gold has low to almost-no correlation with equity markets, and for this reason is generally referred to as a non-correlated asset. Investors can even exploit the absence of correlation between assets and economic indicators. Therefore, incorporating bonds in the same portfolio as stocks would likely generate returns in recessionary times. In contrast, T-bonds’ yields typically rise because investors usually flock to the relative safety of government instruments during economic uncertainty. During times of economic contraction, however, returns from stocks will likely decline because of decreased demand. When consumers are spending and the economy is expanding, including stocks in a portfolio will likely help to ensure growth. Cycling through assets based on their coefficients helps investors to balance their portfolios and try to maintain growth through economic cycles.įor example, the prices of stocks and Treasury bonds (T-bonds) are inversely correlated, meaning that one goes up when the other goes down. Positive correlation is when two assets move up or down in price together, while negative correlation implies inverse movement. A correlation coefficient greater than zero means a positive correlation, while a negative coefficient implies the opposite. Correlation coefficients assign a statistical measure for synchronicity between assets’ prices. In traditional markets, portfolio managers use asset class correlations to help determine an investment strategy. Correlations Are a Useful Portfolio Diversification Tool in Traditional Finance

Low negative correlation