Correlation measures how two assets move in relation to each other. It’s a key concept for building a diversified portfolio.
Correlation Coefficient
| Value | Meaning |
|---|
| +1.0 | Perfectly correlated (move together) |
| +0.5 | Moderately correlated |
| 0 | No correlation |
| -0.5 | Moderately inversely correlated |
| -1.0 | Perfectly inversely correlated (opposite directions) |
Typical Correlations
| Asset Pair | Typical Correlation |
|---|
| Bitcoin ↔ Ethereum | +0.7 to +0.9 (high) |
| S&P 500 ↔ Nasdaq | +0.9 (very high) |
| Gold ↔ US Dollar | -0.3 to -0.5 (inverse) |
| Oil ↔ US Dollar | -0.2 to -0.4 (slightly inverse) |
| Stocks ↔ Bonds | -0.3 to +0.2 (varies by environment) |
| Bitcoin ↔ S&P 500 | +0.2 to +0.5 (moderate, growing) |
| Gold ↔ Bitcoin | -0.1 to +0.3 (weak) |
Correlations in Different Market Conditions
| Market Condition | Stock ↔ Bond | Stock ↔ Gold |
|---|
| Normal growth | Negative | Positive |
| Recession | Positive | Positive |
| High inflation | Negative | Positive |
| Crisis | Positive (both fall) | Negative (gold rises) |
Correlations are not stable. They change with market conditions.
Why Correlation Matters
| Reason | Example |
|---|
| Diversification | Holding two correlated assets doesn’t reduce risk |
| Risk management | Know what your portfolio will do in different scenarios |
| Hedging | Find inversely correlated assets to offset losses |
| Pair trading | Trade two correlated assets that diverge |
The Diversification Problem
| Portfolio | Assets | Effective Diversification |
|---|
| BTC + ETH | Both crypto | Low (correlated) |
| BTC + Gold | Crypto + commodity | Moderate |
| BTC + Bonds | Crypto + fixed income | High |
| BTC + S&P 500 + Gold + Cash | Multi-asset | High |
Correlation Breakdown
During market crises, correlations tend toward 1.0 — everything falls together. This is called “correlation breakdown” and is when diversification fails most.
| Crisis | What Happened |
|---|
| 2008 | Stocks, commodities, and real estate all fell |
| 2020 (COVID) | Stocks and bonds both fell initially |
| 2022 | Stocks and bonds both fell (rare) |
How to Check Correlations
| Tool | What It Shows |
|---|
| TradingView | Correlation indicator |
| Portfolio visualiser | Historical correlations |
| Excel / Python | Calculate using historical prices |
| Crypto-specific | CoinMetrics, Glassnode |
Bottom Line
Correlation measures how assets move together (positive) or opposite (negative). Diversification works best with assets that have low or negative correlation. Correlations change over time and break down during crises. Check correlations regularly and don’t assume they’re stable. A truly diversified portfolio includes assets with different correlation profiles — not just different names in the same asset class.
This content is for educational purposes only. Not financial advice. Do your own research before investing.