The correlation strength of the most important cryptocurrencies in the bull and bear market

Sebastian Lahajnar,Alenka Rožanec

doi:10.21511/imfi.17(3).2020.06

Abstract

The article explores the correlation strength of the ten most important cryptocurrencies, emphasizing the examination of differences during the periods of rising and falling prices. The daily and weekly returns of selected cryptocurrencies are taken as the basis for calculating and determining the correlation strength using the Pearson correlation coefficient. The survey covers the period from the beginning of 2017 to Bitcoin’s last local bottom in mid-March 2020. Research findings are as follows: 1) the most important cryptocurrencies are mostly moderately positively correlated with each other over time; 2) correlation strength decreases slightly during the bull period, but mostly remain in the range of moderate correlation; 3) correlation strength increases significantly during the bear period, with most cryptocurrencies strongly correlated with each other. The results do not change significantly if the daily or weekly cryptocurrency returns are used as the basis. A strong correlation in the period of falling prices prevents the effective diversification of the cryptocurrency portfolio, which must be considered when investing funds in the cryptocurrency market.

Highlights

A cryptocurrency is defined as a digital or virtual currency that uses cryptographic algorithms to ensure security
The daily and weekly returns of selected cryptocurrencies are taken as the basis for calculating and determining the correlation strength using the Pearson correlation coefficient
A strong correlation in the period of falling prices prevents the effective diversification of the cryptocurrency portfolio, which must be considered when investing funds in the cryptocurrency market

Summary

INTRODUCTION

A cryptocurrency is defined as a digital or virtual currency that uses cryptographic algorithms to ensure security. The studies addressing mul- in correlations occurred in the third quarter of tiple cryptocurrency pairs confirm a strong 2019, suggesting that cryptocurrencies could be and positive association between profitabili- more strongly correlated with unfavorable market ty In Interesting insights can be gained by using examining different time frames, the finding that graphs on the coinmetrics.io website (Coinmetrics, stands out is that the price ratio between Bitcoin 2020) This allows us to obtain a graphical repand alternative cryptocurrencies is significantly resentation of the correlation strength between stronger in the short term than in the long term. It depends primarily on high or low market analysis confirms previous findings, while a slight uncertainty, with high uncertainty corresponding decline in the association strength can be detected to the strong association and low uncertainty cor- in 2019

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METHODS

RESULTS

DISCUSSION

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CONCLUSION