A Smarter Way To Trade Cryptocurrencies: How Correlations Can Improve Your Returns

As we often repeat at Coinrule, investing is very challenging, actively trading even more so! Whatever is your investment style, managing a crypto portfolio can be stressful and requires strict discipline and rules.

If you ever attended a financial course, you know well that you shouldn’t “put all eggs in one basket”. The idea of splitting a bunch of eggs across different baskets to reduce the risk of carrying them is smart yet simple. One of the main pillars of portfolio management theory is to diversify the risk by investing in multiple assets.

Nevertheless, splitting your holdings across different assets alone is not enough to diversify your portfolio correctly. The assets you are holding should also be as “de-correlated” from each other as possible. When the different coins you own don’t move in the same direction, you are significantly reducing the aggregate risk because the losses from one coin going down are statistically compensated by another one going up.

In 2018, during the long crypto-winter, apart from very few exceptions, all cryptocurrency prices collapsed. That means that the correlation in the crypto market was very high. On the other hand, if we look for out-performers, we can notice that some coins in specific periods performed actually quite well!

Binance Coin gained 130% in USD terms from February to June 2018. In November 2018, Chainlink had already made up all the losses…