Correlation Matrix
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Last updated
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The correlation matrix indicator shows a statistical measure that describes the degree to which the two assets move in relation to each other.
A positive correlation means that the two assets tend to move in the same direction, while a negative correlation means that the assets tend to move in opposite directions.
A correlation of 1 indicates a perfect positive correlation, while a correlation of -1 indicates a perfect negative correlation. A correlation of 0 indicates that there is no relationship between the assets.
Knowing the correlation between assets can be useful when making investment decisions in the crypto industry.
For one, it can help you assess the level of diversification in your portfolio. Diversification is a key risk management strategy that involves investing in a variety of different assets in order to spread out the risk and reduce the impact on the overall portfolio.
For example in the above matrix the least correlated asset to Bitcoin is Litecoin. In the case a decision purely based on diversification of the portafolio had to be made, LTC would be the least affected by Bitcoin price moves.
Furthermore, this matrix can also be useful when “Liquidity Providing” in different DeFi protocols. Assets with a high positive correlation tend to move together, hence impermanent loss should be less of a risk. While assets with a high negative correlation tend to move in opposite directions, hence impermanent loss can be presented as a greater risk.
By knowing the correlation between different assets, users can make more informed decisions about how to allocate investments. This can help assess appropriateness risk tolerance levels.
