Historically, the Bitcoin price correlation with altcoins has been very strong. What this means is that altcoins and Bitcoin tend to move in similar directions in terms of volatility and value. A correlation of 1 means that they move in the exact same direction, while a correlation of -1 means they move in the exact opposite direction.
Recent data suggests that the Bitcoin price correlation with other coins has been declining. This is probably because Bitcoin is starting to arrive on institutional trading desks. This means that large banks and financial institutions can invest in Bitcoin, but not other cryptocurrencies. Right now, only Bitcoin and a few other currencies are available to these institutions. It stands to reason that most institutions are going to invest in BTC.
The strong Bitcoin price correlation has largely been heralded as a weakness of the entire cryptocurrency movement. This is because the prices of all coins tend to follow Bitcoin. Even a coin that is doing superbly will fall in price because of this positive correlation. However, with a decrease in correlation, high-quality cryptocurrencies will get the opportunity to shine and investors could make a handsome profit if they do their homework. It will also provide opportunities for diversification.
As it stands, most large investment firms will just invest in Bitcoin. Since most coins are highly correlated to BTC, there are no diversification benefits of selecting them. Binance Research also revealed some interesting findings. Privacy-based coins tend to have a higher correlation with each other, and Proof-of-Work coins also tend to exhibit a higher correlation. Perhaps certain industries within the crypto sphere might follow their own patterns as the space becomes more popular.
In particular, Litecoin has seen a sharp decrease in its correlation with Bitcoin. This could make it a useful option for diversification. Stellar and Ethereum continue to have a high correlation. Ethereum has a correlation of 0.9, which means if Bitcoin increases 100% in value, ETH will increase by 90%.
In terms of diversification, there are some coins with a low correlation, but not that many. For more information, check out this correlation matrix. No coin has a correlation of less than 0.22 with Bitcoin. This is significant, as there is still a large correlation between all coins. It will be a positive sign when a cryptocurrency does break this trap and each coin can be evaluated on its own merits, instead of arbitrary trading speculation that does not take network fundamentals into account.
Despite the high correlation, it is possible to see huge gains in niche altcoins. However, this is largely due to hype and speculation. The tokens get inflated and insiders make a lot of money. After the hype is over, the price is reduced and the correlation continues. The correlation may be broken in the short-term, but it evens out over a longer timeline to trend with Bitcoin, the largest cryptocurrency. For now, it reigns supreme.