Digibyte: Correlation Coefficient Case Study and Confusion..

2017年8月13日

Here, I thought it would be interesting to look at correlation coefficients and explain the inefficacies of measuring percent change in trying to understand complex behaviors and relationships between some of the top digital assets and some of the newer ones. Percent change is useful for measuring volatility. It shows where there is a lot of price movement, and where there is none: that's all. Percent change does not measure direction whatsoever. Whether price is moving up or down, the percent change remains the same, and this can be very misleading to new or panicky investors. A plummeting price causes spikes in percent change. Looking at this chart, percent change of the major coins are all currently trending up, while the correlations between them and DGB are all substantially down. Thus, it is useful to employ the correlation coefficients to analyze the directional divergence between coins. What the chart shows is that the correlative relationships do exist, however, they are very finicky, unstable, and difficult to pin down. I hear this question all the time from eager traders: "If Bitcoin goes up, will (______your coin here______) also go up?" This chart shows that the answer is rather complex , at least for DigiByte. Therefore, my standard answer to those questions shall henceforth be this: "Don't count on it." Generally, capital fleeing from BTC in times of distress will seek refuge in the altcoin markets, and FOMO on BTC gains will cause capital to flee from the altcoin markets into BTC. This explains the inverse correlation risks but only to a limited extent. Ethereum is a perfect example recently. As bitcoin price has skyrocketed, Ethereum price has plummeted. And nobody really knows why. Another major factor that impacts correlations in the digital markets is large-scale algorithmic arbitrage traders. These large robotic moves are then picked up by retail robots, which impact markets further and are then picked up by hoardes of manual traders, and this can form a reactionary chain of events in the markets, another manifestation of FOMO, and market paranoia. Happy Hunting Everyone.