This historical correlation indicator refers to the statistical relationship between two assets over a specific period of time.
This one is measured either by the 30 days correlation coefficient or 60 days correlation coefficient.
BTC correlation with ETH & AVAX
Knowing the correlation between assets can be useful in different ways 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.
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.
For example in the graph above, we can see that ETH and AVAX both carry a high positive correlation with Bitcoin. This can potentially signal that Liquidity Providing into a pool that BTC is paired with one of these assets will lower the risk of impermanent loss.
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.