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Термин глоссария20 апреля 2024 г.

Correlation

How two assets move relative to each other — the relationship that builds fortunes when understood and destroys portfolios when ignored.

risk-managementportfolio-managementquantitative-trading

Определение

How two assets move relative to each other — the relationship that builds fortunes when understood and destroys portfolios when ignored.

Correlation

In Simple Terms: Correlation tells you whether two assets move together or apart — in crypto, during crashes, everything moves together.

Correlation measures the statistical relationship between two assets' price movements, ranging from -1 (perfectly inverse) to +1 (perfectly in sync). A correlation of 0 means no relationship. In portfolio construction, low correlation is the holy grail — combining uncorrelated assets reduces overall portfolio volatility without reducing expected returns.

Crypto has a unique correlation problem. During normal markets, altcoins show moderate correlation to Bitcoin (0.5-0.7), allowing some diversification benefit. During crises, correlation spikes to 0.85-0.95 across the entire asset class — the "correlation to one" phenomenon. This means crypto diversification works in calm markets but fails precisely when you need it most. Even worse, correlation breakdown events can wipe out hedged positions. A trader long ETH, short BTC as a "market-neutral" pair trade can lose on both legs if the correlation between ETH and BTC temporarily breaks during a regime-specific event (e.g., an ETH ETF approval while BTC consolidates). Kingfisher's data helps anticipate correlation breakdowns: when GEX+ shows concentrated gamma in one asset but not another, expect temporary decorrelation as dealer hedging creates asset-specific flows.

How It Works

Correlation coefficient (Pearson's r): r = Covariance(X, Y) / (σ_X × σ_Y)

Where σ_X and σ_Y are the standard deviations of X and Y returns.

Crypto correlation matrix patterns:

  • BTC-ETH: Consistently 0.7-0.9 (highest large-cap correlation)
  • BTC-Stablecoins: ~0 (structural — stablecoins are designed to be uncorrelated)
  • BTC-Altcoins (top 50): 0.5-0.8 in normal markets, 0.8-0.95 during crashes
  • BTC-Gold: ~0.1-0.3 (low but occasionally spikes during macro events)
  • BTC-SPX (S&P 500): 0.2-0.5 (increased post-2020, institutional overlap)

Correlation breakdowns:

  • When one asset has an idiosyncratic catalyst (ETF news, protocol upgrade, hack)
  • During forced deleveraging events — everything sells off, even "uncorrelated" assets
  • When funding rate extremes in one asset force positioning unwinds that don't affect others

Why It Matters for Traders

  1. Correlation determines whether your "hedge" actually hedges. Shorting ETH to hedge an ADA long only works if ADA and ETH are highly correlated. During an ADA-specific event (e.g., a Cardano hard fork), the correlation can break, and you lose on both positions. Kingfisher users should check GEX+ across correlated assets before placing hedged trades.
  2. The correlation-to-one event is crypto's biggest risk. When a major liquidation cascade hits (visible on Kingfisher's LiqMap), all crypto assets sell off simultaneously. The only protection is reducing gross exposure or holding true uncorrelated assets (stablecoins, cash, off-chain assets).
  3. Correlation regime shifts create alpha opportunities. When two normally-correlated assets temporarily decorrelate, mean reversion in the correlation itself creates a trade. If BTC pumps 5% and ETH only moves 1% (abnormally low correlation), the pair is likely to reconverge — long the laggard, short the leader.

Common Mistakes

  • Assuming past correlation predicts future correlation. Correlation is time-varying. An asset that showed 0.3 correlation to Bitcoin for 6 months can spike to 0.9 in a week during a market event. Stress-test your portfolio against correlation regime shifts.
  • Diversifying within crypto and calling it "diversified." 10 altcoins with 0.6 average correlation to each other provide almost no diversification benefit during crashes when all correlations spike to 0.9. True diversification requires asset classes with structurally low correlation to crypto.
  • Ignoring correlation between P&L and funding. A portfolio of long perps paying funding has negative carry that correlates with bullish positioning. When the market turns, you lose on price and have already paid funding for weeks. Correlation between strategy components matters as much as asset correlation.

Deep Dive

Want to explore further? Check out:

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