Riding the Bear’s Coattails
So much for a “bull run” huh?
What started off as cautious optimism following Bitcoin’s summer rally to nearly $10,000 has slowly died down, leaving investors confused and yet again looking for another scapegoat. Ethereum, Bitcoin Cash, Litecoin, and the rest of the altcoin crowd have followed suit with stagnating prices.
Red never was CoinMarketCap’s most flattering color.
There’s a saying in crypto that nearly everything rides on Bitcoin’s coattails. Does that hold true in a bear market situation? In this article we’ll dive deeper into understanding the relationship between market cap across altcoins and Bitcoin’s own market cap.
The goal here is to understand how altcoins move in conjunction with Bitcoin’s own market fluctuations. By determining which coins have strong and weak correlations with Bitcoin, investors are better equipped to structure their crypto portfolios in ways that minimize risk across the entire asset class.
Let’s clarify our problem before getting our hands dirty:
- What is the relationship between altcoin and Bitcoin market cap?
- Which altcoins are strongly correlated with Bitcoin?
- Which altcoins are not correlated with Bitcoin?
Let’s quantify this idea of “relationship” using a measure called the Pearson Correlation Coefficient. In statistics we use correlation coefficients to measure how strong the relationship is between two variables of interest: X and Y. Note that correlation is not explicitly trying to solve for causality — that Y is caused by X or vice versa.
We can generate this coefficient by mapping out value pairs of Bitcoin market cap (X) and altcoin market cap (Y) across time for each altcoin.
We’ll be using historical price data from CoinMarketCap.com (CMC). The reason why we’re using CMC is that there is often a large spread in price across different exchanges.
One extreme example lies in South Korean exchanges, which often have a significant premium or discount to buying crypto depending on market conditions. For example, when Bitcoin was at its all time global high of $20,000 in December of 2017, the price was nearly $25,000 in South Korea (some refer to this phenomenon as the “kimchi premium”).
CMC circumvents this issue by taking the volume weighted average of prices across many exchanges.
To keep our analysis focused, we’ll use the following criteria:
- Historical market data from February 1st, 2018 to August 15th, 2018. We’ll define this period as the most recent “bear market” for crypto.
- Coins that have at least 120 days worth of data on CMC
- Top 100 coins based on market capitalization. These cryptos have higher trading volume and therefore more reliable price data.
We would normally fetch data using an API, but unfortunately you cannot access CMC historical data without paying a hefty subscription fee.
So f*** that — let’s use web scraping libraries built by some very talented folks to get what we need.
1. What is the relationship between altcoin and Bitcoin market cap?
Let’s start off with the simplest question on our list. In order to calculate the correlation between the entire altcoin market and Bitcoin, we need to subtract Bitcoin’s market cap from the total crypto market cap. This prevents double counting Bitcoin’s market cap in our analysis.
Altcoin Market Cap = Total Crypto Market Cap — Bitcoin Market Cap
Doing so leads to this market cap evolution over time:
At first glance it certainly seems like there’s a strong positive correlation! Note that the altcoin market shown is inclusive of all altcoins listed on CMC — we’ll narrow our universe down to the top 100 coins a little later.
Below is the correlation matrix between Bitcoin and the entire altcoin market.
We can interpret this result based on the following criteria:
- Coefficient of +1 indicates that the two measured variables always move in the same direction
- Coefficient of -1 indicates that the two measured variables always move in the opposite direction
- Coefficient of 0 indicates no observable linear relationship between the two measured variables
A coefficient of 0.80 is considered very high and shows a strong positive correlation between the Bitcoin and altcoin market.
2. Which altcoins are strongly correlated with Bitcoin?
We’ll apply the same process as before, except now we’ll calculate the correlation coefficient for each individual coin vs. Bitcoin.
Let’s be more stringent with our inclusion criteria. We’ll now only include the top 100 coins by market cap that have at least 120 days worth of data. Doing so allows us to focus on coins with reliable trading volume and price data.
Running the correlation calculation on our new subset of altcoins generates the following density histogram.
Based on the concentration of bars between 0.5 and 1.0 on the X axis, we can immediately tell that most of the top 100 coins are highly correlated with Bitcoin.
- 75 of the top 100 coins have a correlation of 0.55 or higher
- 50 of the top 100 coins have a correlation of 0.76 or higher
These results indicate that when bitcoin’s market cap goes up or down, most coins are highly likely to follow suit!
By sorting our correlation list we can generate the top 20 coins that are most correlated with Bitcoin:
No surprises here with Monero, Litecoin, and Dogecoin showing up in the ranks. Some of Bitcoin’s more well known forks don’t show up in the top 20 but are still highly correlated. For example, Bitcoin Cash sits at 0.80 and Bitcoin Gold sits at 0.84.
3. Which altcoins are not correlated with Bitcoin?
We can simply reverse sort our correlation list to generate the top 20 coins that are the least correlated with Bitcoin:
As you would expect from the previous density histogram, only a few coins are negatively correlated or have near-zero correlation with Bitcoin. It’s not surprising to see Tether, TrueUSD and Dai at the top of the list given these are classed as stablecoins.
Even if you’re a relatively new investor in the crypto space, one mantra you’ll hear echoed across Medium, Reddit, Twitter, and other social media is the importance of diversifying risk in your crypto portfolio. In some sense this is oxymoronic given how incredibly volatile the entire space can be, but it’s a fundamental skill all investors need to master.
By including assets that have negative or near-zero correlation with Bitcoin, you effectively reduce the overall variance and risk across your crypto holdings.
Although most altcoins really do seem to “ride on Bitcoin’s coattails” in the current bear market, I expect more coins will demonstrate real world applications and eventually achieve independence from Bitcoin’s market cap.
Whether you’re hodler, data scientist, or crypto newbie, I hope this analysis has been helpful.
A big thank you to Anthony Xie for providing the inspiration and original code for this analysis. He’s the founder of Hodlbot and I highly suggest you check out his platform if you’re interested in crypto investing on autopilot.
I’ve tweaked a few things from his previous work given the new updates to the CoinMarketCap API, which required a few minor workarounds. Reference code can be found below for you data geeks.
First GIF credited to Jimmy Here (https://www.twitch.tv/jimmyhere) — hilarious individual.
About the Author
I’m a blockchain enthusiast and data scientist based in New York City.
I’ve been exploring YouTube content creation to help others understand the Wild West that we call crypto. I plan on releasing a video to accompany this analysis in the next few days.
Correlations between top 100 coins and Bitcoin by market cap