If you’ve followed the crypto market for any amount of time, you’ll likely have noticed that certain assets seem to move in tandem, rising and falling in pairs or even groups.
This reality presents an opportunity for traders who want to make a quick buck, but how can crypto correlations be harnessed effectively?
Understanding asset similarity
The first point to make is that the crypto market is unique in that there’s a closer correlation between asset prices here than you’ll find in other financial markets.
This is mostly to do with the fact that all crypto assets are underpinned by the same ethos, and so the rise and fall of mainstream tokens is more closely linked than, say, stocks in major companies which might occupy entirely different industries and so be subject to different pressures at different times.
The result is that Bitcoin, as the biggest fish in the crypto pond, is the asset to which the fate of all smaller coins is tied. Most notably, Ethereum’s price follows the movement of Bitcoin closely, even if lower market cap assets in the altcoin scene aren’t as tightly tethered to it.
Appreciating ease of access
A good reason to consider exploiting price correlations for quick profits at all is that it’s incredibly easy to use platforms such as SoFi to trade crypto.
You don’t need a lot of capital to start experimenting, and so new traders are able to enter the fray alongside seasoned vets and stand a decent chance of seeing positive results, so long as they make the right decisions at the right moment.
In terms of selecting trading pairs for the purposes of leveraging small differences in asset prices, correlation may or may not be an indicator worth looking out for. The biggest profits are to be gained in scenarios where two assets are not closely correlated, and so sudden shifts in the price of one while the other remains static gives you a means to strike while the iron is hot.
Also bear in mind that not all correlated coins are directly tradable on a given exchange or platform. You might need to swap one asset to a different class of token, before making another trade to realize gains. The more steps involved, the more complexity you’ll have to contend with, and the more experience you’ll need in crypto trading to avoid making a misstep.
Getting to grips with trading cycles
What you’ll learn with time is that there are cycles to the crypto market, just as there are to other markets where investment is a possibility, and this means that close correlation between coins is not always guaranteed.
For instance, while Bitcoin and Ethereum may frequently match pace with one another, there are events and regulatory decisions which effectively uncouple their prices for a certain period.
We’ve seen Ethereum continue to trend downwards in recent days, while in contrast Bitcoin has been bolstered by upward movement over the same period.
This instability in trading pairs is obviously not ideal for those who prefer lower risk investment strategies. But for traders who do not mind pulling the trigger on moment to moment conversions when it seems that the movement of the markets is in their favor, bearish cycles can pay dividends.
Conclusion
It’s worth noting that there’s never a guarantee that you’ll make a profit from crypto correlations. However, just being aware of this option in a volatile market will incentivize you to keep your ear to the ground and get a sense of when opportunity might come knocking.
