Correlations to Consider When Trading Cryptocurrencies
The cryptocurrency market is back in fashion lately as signs seem to indicate institutional interest in the digital assets space. Viewed by many as an alternative digital investment, the crypto universe attracts more and more investors wishing to further diversify their portfolios.
But the current pandemic brought something new to the market. Suddenly, the cryptocurrency market does not move independently anymore. Correlations with traditional markets are everywhere. Some say that this is a positive sign, in the sense that the market matured. This way, it will attract the professional investing community. It may be so. Regardless of what causes such correlations, traders must be aware of their existence.
Bitcoin, Gold, and the USD – A Trio to Remember
The cryptocurrency market capitalisation exploded in recent years. Suddenly, thousands of coins appeared as retail interest grew higher and higher by the day.
However, one coin stands as the leader in this space. That is Bitcoin.
If the price of Bitcoin rallies, it drags the other altcoins higher too. A decline in the price of Bitcoin triggers a selloff in other altcoins. Rarely, if ever, has the correlation broke. Hence, when trading any other coin in the crypto space, keep an eye on Bitcoin.
Bitcoin, on the other hand, has a strange correlation lately. It often moves hand in hand with the price of gold, a correlation that grew in intensity during the pandemic. With the exceptions of weekends, when Bitcoin keeps moving, the correlation holds almost by the pip point. Hence, we have an explanation for the alternative digital investment opportunity offered by Bitcoin.
But gold mainly reflects the USD’s faith. Higher gold means lower USD, and lower gold translates in a higher USD. Therefore, the Bitcoin/gold direct correlation is explained.
By correlating with traditional markets, Bitcoin becomes more a traditional financial asset and less the revolutionary, alternative form of new money. The danger is that if things do not change in the future, Bitcoin’s “charm” will fade away. It will become just another commodity in the world of alternative investments.
The wild card here is the lack of regulation. Unlike traditional alternative investments, the cryptocurrency market is largely unregulated. Moreover, safety is an issue, too – many frauds are still reported with people losing their life savings due to cyberspace hacking.
In the end, there is a risk associated with any investment. But when a regulator enforces some rules, it levels the playing field and makes the market more competitive, mature – and, in the end, attractive.
Maybe this is what Bitcoin lacks. Regulation.