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.
The increasing link between Bitcoin and altcoins is cause for alarm.
Arcane Research, a crypto market analytics service provider, stated in its latest weekly crypto market report that Bitcoin had a 0.90 correlation with Ethereum at the start of the week. The correlation was much greater with other altcoins, at 0.91.
The present correlation coefficients are gradually approaching the level of 0.95 reached during the 2018/2019 bear market. The metric which analyzes the type of link Bitcoin’s price has with other assets is creating a picture of “an overall risk-averse sentiment in the market.”
However, Arcane believes that this is a reason for caution for the cryptocurrency market. The altcoin market following Bitcoin in price means that there is little demand for hedging risk in holding Bitcoin with altcoins. Where there is a demand, employing altcoins to diversify risks associated with Bitcoin exposure has become more challenging.
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.
The current trend, according to Arcane Research, is unlike any past market cycle. Sudden sharp sell-offs triggered previous high correlation periods in the market. Meanwhile, during the last few months, the recent tendency has been steadily increasing.
The correlation between Bitcoin and other markets
Amid concerns about inflation, Bitcoin has recently been linked to the stock market. This year, Bitcoin has often fallen along with S&P 500 Index. According to Business Insider, a 7% decline in the popular stock index resulted in a 17% drop in Bitcoin in January.
The price action has been used to refute claims that Bitcoin is a gold-like inflation hedge. Many Bitcoin critics, like Peter Schiff, have often pointed this out.
Meanwhile, the International Monetary Fund (IMF) has emphasized that Bitcoin’s high volatility and correlation with traditional assets make it a threat to economies.
Bitcoin analysts, on the other hand, believe that Bitcoin is displaying symptoms of decreasing association with risky assets. Bitcoin was at an inflection point in its shift into being global digital collateral, according to Bloomberg’s Mike McGlone, who said the currency was showing strong “divergent strength.” Bitcoin is now worth roughly $40,700, down 0.11 percent in the last 24 hours.