Why are the prices of cryptocurrencies so correlated (to Bitcoin's)?

[fluidistic]

Lately I have been checking the price of many listed cryptocurrencies (so probably most of the most traded ones), and I noticed that there is a high correlation with Bitcoin's. I have read that Bitcoin's price usually have a time edge over the others, but I could not notice it (seems to be of the order of the second, or less, to me). I also noticed that for some not-that-much-traded cryptocurrencies, their price change as if bots made their price follow bitcoin, not humans. I know this because of roughly regular in time trades, and how the orders change over time, it's as if they are constantly readjusted in real time, following bitcoin's evolution, and when a trade is done, the price of the currency follows, and thus follows bitcoin's price. Why on Earth would someone write bots to do that? I.e. to make the top currencies all follow bitcoin. Surely, it must be because they earn money that way, but why? How can someone make money by "enforcing" cryptocurrency prices to follow bitcoin's? Is it because it is a sort of anticipation of what the market will do? That is very strange...
Thanks for any pointer.

 

[DaveE]

I think free market trading can do that too. Like the way gold prices in London are correlated with the prices in NY. Traders can make a lot of money with arbitrage if there are differences that aren't sustainable, but they have to be quicker than the other arbitrage trader. Bots are continually making these trades in much less than 1 second.
https://en.wikipedia.org/wiki/High-frequency_trading

 

[Vanadium 50]

Is this the case? I found this plot on the Intertubes:

That's a correlation, but not a good one. Eyeballing it, R is maybe 0.5, so R² is maybe a quarter.

This is the Euro vs. the Swiss Franc over the last 20 years. The correlation is tighter, although the correlation changes over long time scales. Correlation over the last 5 years is about 0.7.

And here are two stocks that shouldn't have anything to do with each other, GME and AMC.

 

[Office_Shredder]

Vanadium, I think that first plot is a pretty good correlation!

The Swiss franc was literally pegged to the euro for several years, so that cloud plot is a bit misleading. I think you can even see there's kind of two regimes in that cloud plot.

A better example would be like, msft vs ibmAlso, you've plotted prices, but it would make more sense to plot returns against returns. That's what most people do when doing financial modeling.

 

[Vanadium 50]

The Swiss franc was literally pegged to the euro for several years

2011-2015. The left half of the lower cloud.

Also, you've plotted prices, but it would make more sense to plot returns against returns.

But the OP is talking prices.

My take from looking at this plot is that BTC and ETH have correlations weaker than real currencies, and about the same for meme stocks for medium-duration periods.

 

[fluidistic]

Is this the case? I found this plot on the Intertubes:
View attachment 285671

That's a correlation, but not a good one. Eyeballing it, R is maybe 0.5, so R² is maybe a quarter.

This is the Euro vs. the Swiss Franc over the last 20 years. The correlation is tighter, although the correlation changes over long time scales. Correlation over the last 5 years is about 0.7.

View attachment 285672

And here are two stocks that shouldn't have anything to do with each other, GME and AMC.

View attachment 285673

If you go to https://guides.cryptowat.ch/assets-markets/understanding-asset-correlation, you will see that correlation is about 0.7 to 0.9, unless you look over a very long time period, in which case it falls down to 0.4 to 0.75, roughly. So, I would answer by a yes.

 

[Rive]

Without solid fundamentals, the price of bitcoin (and other incarnations) almost purely depends on the actual level of 'faith' behind cryptocurrencies in general. So no wonder they correlate.

Regarding those bots... A reliable correlation is priceless for automated trading. Far better to bet on this than bet on trends or anything.

 

[fluidistic]

Without solid fundamentals, the price of bitcoin (and other incarnations) almost purely depends on the actual level of 'faith' behind cryptocurrencies in general. So no wonder they correlate.

Regarding those bots... A reliable correlation is priceless for automated trading. Far better to bet on this than bet on trends or anything.

But there are a ton of very different projects, cryptocurrencies can be quite different than bitcoin. Some of them have a big part stacked, others none at all, etc. so definitely there are huge disparities in what people hope from each particular cryptocurrency. However this is almost not reflected in the (short and medium at least) term.

 

[Rive]

cryptocurrencies can be quite different than bitcoin

Those are technical details. Just like a coin, bill, coupon, credit/debit card of same currency. All comes with minute differences but based on the same currency/faith.

 

[fluidistic]

Those are technical details. Just like a coin, bill, coupon, credit/debit card of same currency. All comes with minute differences but based on the same currency/faith.

I disagree. For example I, (and I guess I am not alone) believe that Bitcoin has no chance for a real mass adoption due to low transaction speed (but that it could have a future as a refuge cryptocurrency like gold), for ethereum it is not clear due to transaction fees too high (some people believe this will be resolved, others not), dogecoin has no future to be used as real currency. Algorand might be really usable in future, etc. Opinions differ of course. But no, bitcoin's faith is not the same as other cryptocurrencies faith, I would argue.

 

[BWV]

if the investors/traders are correlated then the asset price will be. The marginal buyers and sellers of different cryptos are largely the same

 

[BWV]

There is also a basic proposition in financial economics that all assets with a risk premium (not that crypto offers a risk premium, IMO its just a zero-sum pyramid scheme) will be correlated - the idea of an uncorrelated asset offering a higher expected return than a safe asset like Treasuries should not exist, as investors would arbitrage the opportunity away. The thinking is you only get paid a risk premium for assuming non-diversifiable macroeconomic risk - i.e. the fact that the stocks in your brokerage account go down at the same time you get laid off in a recession accounts for the consistent risk premium for stocks. Other volatile assets, like commodity futures, do not pay risk premiums - the expected return is the risk free rate, adjusted for carry costs, no matter the volatility of the commodity.

 

[indub]

Lately I have been checking the price of many listed cryptocurrencies (so probably most of the most traded ones), and I noticed that there is a high correlation with Bitcoin's. I have read that Bitcoin's price usually have a time edge over the others, but I could not notice it (seems to be of the order of the second, or less, to me). I also noticed that for some not-that-much-traded cryptocurrencies, their price change as if bots made their price follow bitcoin, not humans. I know this because of roughly regular in time trades, and how the orders change over time, it's as if they are constantly readjusted in real time, following bitcoin's evolution, and when a trade is done, the price of the currency follows, and thus follows bitcoin's price. Why on Earth would someone write bots to do that? I.e. to make the top currencies all follow bitcoin. Surely, it must be because they earn money that way, but why? How can someone make money by "enforcing" cryptocurrency prices to follow bitcoin's? Is it because it is a sort of anticipation of what the market will do? That is very strange...
Thanks for any pointer.

Maybe someone mentioned this already but I didn't read through, my apologies. Most altcoins use a lot of the same libraries as bitcoin. Doesn't matter really (in the short term) how much different you make the rest if they pull out of the same library. Once that good code is built it is what it is and you build more off of that, like C++ or Java etc. I think that's why the prices are so correlated, it is just code after all.

 

[fluidistic]

Maybe someone mentioned this already but I didn't read through, my apologies. Most altcoins use a lot of the same libraries as bitcoin. Doesn't matter really (in the short term) how much different you make the rest if they pull out of the same library. Once that good code is built it is what it is and you build more off of that, like C++ or Java etc. I think that's why the prices are so correlated, it is just code after all.

Either I am missing the joke, or I am missing something else.

 

[indub]

Either I am missing the joke, or I am missing something else.

I wasn't intending that as a joke even though it sounds like one lol, just throwing out a possibly dumb idea. I forgot to say however that of course the prices have to do with money flows, obviously without money moving around the coin prices wouldn't do anything. Like you I've been pondering why many coins follow bitcoin for a long time and the thought popped into my head the other day like it could be because of the underlying code libraries. Why else would a coin with substantially less money flow move relatively similar to bitcoin? Bots, maybe I guess, but I don't see how HFT for crypto could operate like they do in stocks, where the best HFTs have to be closest to the exchanges for the best speed. I don't know how much return HFTs can make in crypto compared to some average Joe making trades. This isn't the same as stocks or gold and other commodities which are primarily priced based on scarcity or abundance. Forex is probably closest fundamentally but fiat currency prices are all over the place compared to each other. Anyways back to my code idea, C++ for example has extensive code libraries, there are tons of different programs for different purposes built with C++ but the underlying code is still there. It's taken 50 something years since C was created to really start making programs very different each other. A lot of people say altcoins follow bitcoin because people buy into bitcoin with fiat first and then swap for other coins which makes the altcoins follow bitcoin. I don't buy that though either. Maybe its all of the above. Thoughts?

 

[fluidistic]

I wasn't intending that as a joke even though it sounds like one lol, just throwing out a possibly dumb idea. I forgot to say however that of course the prices have to do with money flows, obviously without money moving around the coin prices wouldn't do anything. Like you I've been pondering why many coins follow bitcoin for a long time and the thought popped into my head the other day like it could be because of the underlying code libraries. Why else would a coin with substantially less money flow move relatively similar to bitcoin? Bots, maybe I guess, but I don't see how HFT for crypto could operate like they do in stocks, where the best HFTs have to be closest to the exchanges for the best speed. I don't know how much return HFTs can make in crypto compared to some average Joe making trades. This isn't the same as stocks or gold and other commodities which are primarily priced based on scarcity or abundance. Forex is probably closest fundamentally but fiat currency prices are all over the place compared to each other. Anyways back to my code idea, C++ for example has extensive code libraries, there are tons of different programs for different purposes built with C++ but the underlying code is still there. It's taken 50 something years since C was created to really start making programs very different each other. A lot of people say altcoins follow bitcoin because people buy into bitcoin with fiat first and then swap for other coins which makes the altcoins follow bitcoin. I don't buy that though either. Maybe its all of the above. Thoughts?

The idea is bogus in that its logic would mean that the price fluctuations of paintings would follow the Joconde's because the Joconde was painted with paints, which is something all other paintings are based on.
Regarding people buying BTC and then swap it to altcoins, you can check out the volumes youself, no need to guess, and you'll see that most trades are done with stablecoin/altcoins rather than btc/altcoins.

 

[indub]

The idea is bogus in that its logic would mean that the price fluctuations of paintings would follow the Joconde's because the Joconde was painted with paints, which is something all other paintings are based on.
Regarding people buying BTC and then swap it to altcoins, you can check out the volumes youself, no need to guess, and you'll see that most trades are done with stablecoin/altcoins rather than btc/altcoins.

You can't compare what I said to something like art. Art's value isn't based on solely on money flow or the paint used. Someone may pay $50 for a painting and someone else may pay $1000 for the same painting. It's not like someone pays $50 for 1 bitcoin because that's what they feel its worth and at the same time someone else pays $1000 for 1 bitcoin because that's what they feel its worth. You could've went with NFTs instead but then we're just back to talking crypto again. Paint itself would've been a better comparison to what I am saying. The price of different paints/colors follow each other pretty close since they are made up of similar components.

Let me put it another way, compare it to human biology. Money flow in this case would be like diet. We all have similar dietary needs based on genetic code of being homosapian. Someone may consume more calories than others but we all still follow the same basic genetic code. Other factors aside, as long as we eat, we all grow and follow a similar graph. In this example crypto's code is like our genetic code and money is like our diet.

Maybe my logic here is flawed but there's still no other explanation of why alts follow bitcoin that actually make much more sense.

And I wasn't the one saying people buy BTC first then swap which is why they are so correlated. I disagree with that, I don't buy that explanation. But if you search for why altcoins follow bitcoin that is the number one answer. Most explanations online state something like this:

The main currency in the cryptocurrency markets is Bitcoin (fiat currency, ethereum, and tether are also used, but Bitcoin is the primary currency). Given this, alts tend to fund Bitcoin runs and Bitcoin tends to fund alt runs. Given this relationship, Bitcoin price movements (or lack thereof) tend to effect altcoin prices.

 

[Astronuc]

I imagine the answer to the title question has to do with the origin/timing and success of the digital currencies, including services and volume of trade/use.

https://en.wikipedia.org/wiki/Bitcoin
The cryptocurrency was invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto.

https://en.wikipedia.org/wiki/Ethereum
"Ether (ETH or Ξ) is the native cryptocurrency of the platform, which, after Bitcoin, is the largest cryptocurrency by market capitalisation. Ethereum is the most actively used blockchain." "Ethereum was conceived in 2013 by programmer Vitalik Buterin. In 2014, development was crowdfunded, and the network went live on 30 July 2015."

 

[fluidistic]

You can't compare what I said to something like art. Art's value isn't based on solely on money flow or the paint used. Someone may pay $50 for a painting and someone else may pay $1000 for the same painting. It's not like someone pays $50 for 1 bitcoin because that's what they feel its worth and at the same time someone else pays $1000 for 1 bitcoin because that's what they feel its worth. You could've went with NFTs instead but then we're just back to talking crypto again. Paint itself would've been a better comparison to what I am saying. The price of different paints/colors follow each other pretty close since they are made up of similar components.

Let me put it another way, compare it to human biology. Money flow in this case would be like diet. We all have similar dietary needs based on genetic code of being homosapian. Someone may consume more calories than others but we all still follow the same basic genetic code. Other factors aside, as long as we eat, we all grow and follow a similar graph. In this example crypto's code is like our genetic code and money is like our diet.

Maybe my logic here is flawed but there's still no other explanation of why alts follow bitcoin that actually make much more sense.

And I wasn't the one saying people buy BTC first then swap which is why they are so correlated. I disagree with that, I don't buy that explanation. But if you search for why altcoins follow bitcoin that is the number one answer. Most explanations online state something like this:

I did not really understand the 1st paragraph. Some people are willing to only buy a BTC at X, others at Y. The price is just the last value people agreed to trade for a BTC (and there is no absolute price, it differs according to the exchenge website and even between p2p offers). I do not see how this differs from a paint. Some people are willing to pay more than others for the same paint.

Regarding paint colors, I rhink this is not the same for cryptocurrencies in that the latter are used for different purposes. E.g. BTC long term investing, as opposed to ''shitcoins'' like dogecoins where profit has to be made quickly and by pump and dump schemes. Others like monero and algorand have also different uses.
People don't give a damn about which libraries the code of the currencies are made. Most of the whales probably don't even know what a library is.

 

[fluidistic]

''And I wasn't the one saying people buy BTC first then swap which is why they are so correlated. I disagree with that, I don't buy that explanation. But if you search for why altcoins follow bitcoin that is the number one answer.''
I agree with you, this is false at least as of now.

 

[BWV]

Cryptos are correlated because it’s the same group of investors/speculators/fraudsters/bag holders trading them.

 

[fluidistic]

Cryptos are correlated because it’s the same group of investors/speculators/fraudsters/bag holders trading them.

Yeah, this is what you've wrote already in post 11, and it's the explanation that makes most sense to me, as well.
However I am still puzzled why bots (and not humans) are specially created to adjust buy and sell orders to follow bitcoin's fluctuations in real time. This gains money in average I suppose, if as you say, it's the same group of investors who are trading all cryptocurrencies (listed on exchenges). But is that all there is to it?

 

[indub]

I did not really understand the 1st paragraph. Some people are willing to only buy a BTC at X, others at Y. The price is just the last value people agreed to trade for a BTC (and there is no absolute price, it differs according to the exchenge website and even between p2p offers). I do not see how this differs from a paint. Some people are willing to pay more than others for the same paint.

Regarding paint colors, I rhink this is not the same for cryptocurrencies in that the latter are used for different purposes. E.g. BTC long term investing, as opposed to ''shitcoins'' like dogecoins where profit has to be made quickly and by pump and dump schemes. Others like monero and algorand have also different uses.
People don't give a damn about which libraries the code of the currencies are made. Most of the whales probably don't even know what a library is.

Regarding the first paragraph, we're basically saying the same thing. Artwork comes down to the highest bidder for what they think its worth. Someone doesn't buy a partial piece of a painting, break it off and hang it on the wall. Bitcoin is bought at whatever market value is and people can buy partials. The whole paint color thing wasn't my idea though lol, I was just saying if you were to make the comparison from what you said that comparing paint color prices would be more similar than comparing artwork.

Each coin has different uses, which is my point that most are built with the same underlying code libraries. Doesn't matter what whales or any investor knows of the code. As long as money is moving the coin prices should technically move generally the same based on their underlying code because that's what they're coded to do. I think that's regardless of whether or not people o bots are swapping or buying/selling between different coins. The coins were closely correlated before stablecoins were created. The code helps the programming of bots but I don't think bots are the reason prices are so correlated. Traders using bots don't have to pay as much attention to make money since they can plan their bot trading algorithms based on the code. As far as I know crypto transactions once submitted are final, HFTs don't get to see the transaction and make trades against it first so bots must be following something else. A program is a program does what it's made to do, doesn't matter if its a cryptocurrency or microsoft word its going to follow the code.

I don't know though, just a thought. I'm not trying to say I'm right or wrong but the code has something to do with the price correlations. Cryptos are code.

 

[fluidistic]

The thing that remains unanswered is that, for example if you take a low volume traded crypto, whose price might updated less frquently than once a minute because no trade is being done, and if you check the buy and sell orders, you will see that they are updated at every second (by bots, not humans), to follow BTC price fluctuations. So it may happen that the current price is X because the last trade that took place was at X price and ocurred say 10 minutes ago. Great, you would think that you could trade at a price around X, but no. BTC has fallen by 3 percent in the last 10 minutes and.the bots have adjusted the buy and sell orders to about 0.97X.
This has nothing to do with the fact that this altcoin may or may not share libraries with BTC, it is people who made trading bots behave.this way. I could make it if I wanted. I suppose this earns money in average, but why? That's one of my questions.

The price of a cryptocurrency is not coded into it, and a cryptocurrency also has a tokenomics around it, whixh may differ a lot from BTC (e.g. some coins have infinite supplies, unlike BTC), yet.their price is still heavily correlated to BTC.

 

[indub]

I suppose the why, for now at least, is probably just because they can. Might not be any other reason. Since bitcoin still holds 50% or more of the crypto market share their bots can buy into bitcoin, move its price up, then trade out for a profit into altcoins knowing those will follow, then repeat the cycle. I know prices aren't coded into crypto, but its still all connected. Without the code there's no crypto and without money there is no price, so the bots (if they are the reason for the correlations) are just taking advantage of that while it lasts. Maybe things will start to decouple more as the coins become more mainstream. If they don't then I'll be back here talking about code libraries again lol.