Correlation with equity markets
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 4 min
In short
Correlation states, on a scale from -1 to 1, how far two assets have moved together. Between crypto and equities it has shifted substantially over time. The figure describes the strength of a past relationship — not its cause, and not its future.
Key points
- A statistic from -1 to 1 for how assets move together
- The figure has shifted a great deal over time
- Correlation does not establish causation
- The conclusion depends on the window chosen
Definition
A statistic showing how far two assets' returns move in the same direction: near 1 means together, near -1 means opposite, near 0 means no visible relationship.
The calculation simply lines up both assets' returns and computes a correlation coefficient. For crypto, comparisons with broad or technology equity indices come up most often, on the reasoning that both react to the same inputs, such as rate expectations.
The number is not stable, however. There have been stretches with almost no visible relationship and stretches of close co-movement with equities. As market conditions and participants change, so does the correlation, so no single reading is a permanent property.
Nor does high correlation imply causation: both series may simply be responding to a third factor. And in portfolio terms, it is well documented that correlations across many assets rise together during sharp market-wide declines, exactly when diversification was supposed to help. Judging diversification from calm-period figures alone is a mistake.
Watch out for
- · Do not assume past correlation fixes the future relationship
- · During sharp declines, previously low correlations tend to rise together
- · The figure depends on the window and on daily versus weekly returns; check both