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New Data Shows An Overall Risk-Averse Sentiment In The Crypto Market

coingape.com 18 March 2022 13:50, UTC
Reading time: ~2 m


The crypto market often alternates between bullish and bearish sentiments and is often indicated by various metrics. One of these metrics is Bitcoin’s correlation to other markets. According to new data, Bitcoin’s correlation to the rest of the crypto market is nearing all-time highs.

Bitcoin’s rising correlation with altcoins is a cause for concern

In its latest weekly crypto market report, crypto market analytics service provider, Arcane Research highlighted that at the start of the week Bitcoin was posting a 0.90 correlation with Ethereum. With other altcoins, the correlation was even higher at 0.91.

The current correlation coefficients are rapidly closing in on the high of 0.95 during the bear market of 2018/2019. The metric which measures the kind of relationship Bitcoin’s price has with other assets is painting a picture of “an overall risk-averse sentiment in the market,” Arcane Research noted.

This is a cause for concern for the altcoin market however, Arcane opined. The altcoin market trading in lockstep with Bitcoin means that there is little demand for hedging risk in holding Bitcoin with altcoins. Where the demand is, there is now also greater difficulty in using altcoins to diversify risks associated with Bitcoin exposure.

So far this year, the correlation between BTC and ETH has grown from 0.78 to 0.9, in general suggesting a prevailing risk-averse sentiment in the crypto market and a low desire to rotate into altcoins, Arcane noted.

Arcane Research also noted that the current trend is quite different from other market cycles. Previous high correlation periods in the market were caused by sudden sharp sell-offs. Meanwhile, the recent trend has been proceeding steadily over the last few months.

Bitcoin correlation with other markets

Bitcoin has also been shown with the stock market recently amidst concerns around inflation. This year, Bitcoin often crashed along with S&P 500 Index. In January, a 7% drawdown in the popular stock index saw a 17% drop in Bitcoin as reported by Business Insider.

The price action has been used to debunk arguments that Bitcoin is an inflation hedge like gold. Bitcoin critics like Peter Schiff have pointed this out often.

Meanwhile, the International Monetary Fund (IMF) has stressed that Bitcoin’s correlation with traditional assets made it a threat to economies due to its high volatility.

However, Bitcoin ardents maintain that Bitcoin is showing signs of reducing correlation with risk-on assets. Bloomberg’s Mike McGlone has stated that Bitcoin was nearing an inflection point in its transition toward being a global digital collateral by showing strong “divergent strength.” Bitcoin is currently trading at around $40,700, down 0.11% in the last 24 hours.

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