Why Cryptocurrencies Tend To Correlate With Each Other

Anyone looking to invest in cryptocurrencies has a wide range of different coins from which to choose. Of course, Bitcoin is the prominent market leader, but other popular picks include Ethereum, Litecoin, and Ripple, alongside a host of more minor currencies. In deciding which to invest in, you may study recent data to see which are most likely to increase in value or at least stay stable.

Surprising correlations

You may notice surprising correlations when studying and comparing the price movements of different cryptocurrencies. Although there may be outliers and occasional exceptions, different crypto coins tend to move in similar patterns. When one increases in value, others do as well, and vice versa. It’s rare for any coin to show significant price moves in isolation.

Investor sentiment

Why should this be the case? Like any other asset class, cryptocurrencies are affected by investor sentiment. If enough people think a coin is worth buying and act on that sentiment, its value will increase. Conversely, the value will drop if enough investors get skittish and start selling coins. As with all financial markets, value is powered by belief, and market sentiment is often a self-fulfilling prophecy.

Brand loyalty

One can often see the direction of sentiment by joining in with discussions in the crypto trading community. Different investors will have their favoured coins and tend to stay loyal to them through thick and thin. When people buy or sell in large numbers, it’s usually due to new investors coming to cryptocurrency for the first time or traders deciding to reduce their overall cryptocurrency holdings generally, rather than lots of individuals deciding all at once to sell one coin and buy another.

Underlying causes

These decisions are often driven by news stories that impact the whole cryptocurrency community, such as announcements of new legislation. In addition, broader economic or geopolitical uncertainty can cause large groups of people to buy into cryptocurrency as an alternative to falling fiat currencies. While marketing strategies can help launch a new brand, the underlying causes usually affect cryptocurrency as a whole rather than individual coins.

The brightest star

Because Bitcoin is the biggest cryptocurrency and the market leader, other coins are often perceived as tied to it or following the trends it sets. Price movements in Bitcoin are usually mirrored by other cryptocurrencies but to a lesser extent. Bitcoin has been described as the brightest star in the cryptosystem, with other currencies falling into orbit around it like planets.

Similar responses

This isn’t to suggest a literal connection between the value of Bitcoin and other cryptocurrencies. As the most well-known and strongly supported virtual coin, Bitcoin is most strongly affected by market sentiment, for good or ill. The other currencies are affected in the same way by the same impulses. They are not affected by the movements of Bitcoin itself but by the same currents the currency is responding to.

Therefore, there is little point in buying several different cryptocurrencies, as this won’t help diversify your portfolio. Instead, the best way to play the crypto market is to choose the coin that appeals most to you and stick with it through its ups and downs.