What Is Correlation?
Correlation measures how two assets move in relation to each other, expressed as a coefficient between -1 and +1. A correlation of +1 means they move identically; -1 means they move exactly opposite; 0 means no relationship. In crypto, most altcoins have high positive correlation with Bitcoin (0.5-0.9), meaning they tend to move in the same direction.
How Correlation Works
Crypto-to-traditional-market correlations have increased over time. Bitcoin's correlation with the Nasdaq was near zero before 2020 but rose above 0.6 during 2022, as institutional capital began treating BTC as a risk asset. This correlation is not static — it tends to increase during risk-off events (everything sells together) and decrease during crypto-specific catalysts.
Why It Matters for Traders
Correlation analysis is essential for portfolio construction and hedging. If all your positions are highly correlated with BTC, you have concentrated directional risk disguised as diversification. True diversification requires assets with low or negative correlation. During market stress, correlations typically spike toward 1 (everything sells together), making pre-planned hedges critical.