Cross asset correlation in simple words is defined as movement of different particular assets together and it is very important when you are managing your portfolio to understand that what is a correlation between particular assets because when you would have knowledge about it then it would help you to diversify the risks to and optimize the returns.
If I give an example then you can say that you have a portfolio in which there are different assets you have and you can suppose that these are stocks, bonds, real estates and cryptocurrencies. It is very definite and interesting to say that there are unique features and characteristics each and every asset have and that's why it is the reason of their different behaviour in the market because we all know that there are some affects that behave poorly and some behave in good way in different economic conditions.
Correlation is important for the measurement of relationship between price movements of particular to assets because through correlation we can know that prices of two particular assets are moving in the same direction or in opposite direction or they have not at all any relationship with each other. There is a scale which is used for the measurement of correlation and it is marked from -1 to + 1. When I talk about correlation of +1 then it is the indication that assets are moving perfectly in sync and correlation of -1 means that they are moving in opposite direction of each other.When we see a correlation of zero then it shows that there is no relationship is existing in between two particular assets.
Now I am going to apply this concept in cryptocurrencies.For effective diversification strategies it is very important to understand correlation between different Crypto assets. Suppose if there are two particular currencies that have a very high level of positive correlation with each other so it means that they are going to move in the same directions so we can say that if there is one which is going up then definitely other cryptocurrency would also follow the first one. And if there is high level of negative correlation between two particular cryptocurrencies then it means that they are moving in opposite direction of each other. In the same way as I have explained you can say that if there is one which is going up then definitely the Other would not follow it and it would go down.
It is possible to significantly reduce the impact of market volatility by the diversification of your cryptocurrency portfolio which have negative and very low level of negative correlation particular assets. If I give an example then you can say that if there is Bitcoin and Ethereum with high level positive correlation then two hold both of them would not provide that level of diversification as you would like but if you are going to add a cryptocurrency with negative correlation it would be important to offset risk and significantly enhancing the performance of portfolio.
Correlation is not something which have fixed value because it can change with the passage of time in crypto world which is highly volatile.There are different factors like market trends,news events, regulatory changes for influencing correlation between particular crypto assets.So with the changing correlations this is very important to regularly monitor your portfolio.
Selection of assets with low and negative correlations are effective diversification strategies in cryptocurrencies for spreading your risks.You can significantly reduce impact of any particular assets poor performance at your overall portfolio by holding particular different cryptocurrencies that have different correlation pattrens.
Cross asset correlation can be a great way to change bullish and bearish market conditions and traders can adapt their portfolio strategies based on the overall market sentiment by leveraging their knowledge.
When there was bullish trend and market is in upward trend then definitely cross asset correlation would increase.It means to say that there are different particular assets like stocks, bonds and cryptocurrencies would move in same direction during positive correlation.Investors would have positive outlook in this way at overall market so it increase the demand for different particular assets also.
By diversification of their portfolios with those assets that have positive correlation traders feel very easy to take advantage of this increase level of correlation while market is in bullish trend. In other words we can say that is it is just like and investment in those particular tokens that are very likely to take benefit from overall upward trend and if I want to elaborate it with the help of an example then I can say that if stock market is performing very well then traders would feel very attracted towards adding stock to their portfolios and increasing their exposure to stocks more and more.
When I talk about situation opposite to that which is bearish trends in market then at that time it means that market is experiencing downward trend and in this way cross asset correlation would also decrease So in this scenario there will be different assets that would move in different directions due to having negative and very low correlation So in this scenario investors and traders would take a lot of precautions before getting involved into the market and they may have a negative outlook on the market which leads to increase level of uncertainty also.
During bearish trend in market traders can leverage this level of negative correlation by the diversification of their portfolios with those tokens which have negative correlations to the market. So when someone invest their assets in this scenario then it is likely to perform well and to provide a hedge during a time when market is in downward trend and I can explain it also by giving you a simple example that if the stock market is experiencing a downtrend then traders would prefer to add bonds and other defensive assets to their portfolios for the reduction of risks involved.
It is very easy for traders to adapt their portfolio strategies according to the situation and according to the market conditions by understanding that how cross asset correlations are changing in different market conditions.Traders can adjust allocation of their assets in their personal portfolios on the basis of prevailing market sentiment so it would permit them to mitigate the risks in a significant way and take advantage of the opportunities that are given and presented by the market overall.
Market conditions may vary in Arabic way because correlations don't remain constant and are not fix I have already talked about it above that's why traders duty is to monitor correlations between different assets for ensuring their portfolio remain aligned with investment goals and risk tolerance.
For effective management of risk and portfolio diversifications it is very important to understand cross asset correlations. Traders feel very relaxed to meet again the overall portfolio risks by the allocation of assets with negative and very low coordinations.
Diversification is one of the most important key for the management of risks.It involves spread of investments across different effects classes for the reduction of the impact of any asset performance at overall portfolio so when I talk about gross set correlations then they have very significant role in the determination of the effectiveness of diversification strategies.
When I talk about different periods of market or economic uncertainties then assets with the negative correlations perform differently from each other. I mean to say that if there is one asset which is experiencing decline then another asset would remain stable in this scenario so by the allocation of assets with negative correlation traders can create more resiliency which is less susceptible to large loss during market downward trend.
Now I am here presenting myself with some of the examples in which you would understand that how by the allocation of assets with negative correlations would be very helpful for the mitigation of the over all over portfolio risks.
- Stocks and Bonds
When I talk about example of stocks and bonds then most often both of them have negative correlation with each other and when stock market is experience then investors would seek the safety of bonds which leads to increase in the prices of Bond. When you include bonds in portfolio then they mainly and most majorly consists of stock which traders can use for the reduction of overall exposure of risks associated with it and if market is going through a down trend then decline in stock prices maybe of set by increase in the prices of stocks which provides a cushion to the portfolios and in this way it's a positive thing.
Gold and Stocks
Gold most of the time is considered that this is one of the safe effect and especially if there are times going on related to economic uncertainty's so it tends to have negative correlation with stocks so we can say that if the price of stock is falling then investors would flock to Gold because they would consider that it's very valuable which can drive up it's price so by including gold in portfolio along side stocks traders can significant reduce the risk and if price of stock is going to decline then gold price pump would help out in offsetting the losses in stock portion of portfolio.
Real Estate and Stocks
This is an other example in which there is a scenario that real estate investments like rental properties can have very low correlation with stocks. Real estate tends to be less influenced by short term fluctuations in market and in this way it can provide a constant income stream also.Traders can diversify risk exposure buy including real estate investments in portfolio which contains stocks so if the price of stock is declining then you can say that Income which is generating from real estate investments would be helpful in the mitigation of over all risks that are associated with portfolio.
When I talk about correlation between STEEM and other cryptocurrencies then there are very interesting trends in histories we have seen but it is important to understand that correlations are not something which is fixed because it can change with the passage of time that's why is very important and significant to monitor new and new data at regular basis.
When I talk about early days of cryptocurrency market then there was a very high level of positive correlation among the most cryptocurrency and the mean to say it is that when the Bitcoin and Ethereum experienced certain level of price movements then STEEM also moves in the similar direction of them because of positive correlation existence and it was mainly due to significant over all market sentiment and due to dominancy of BTC and ETH also.
With the passage of time when Crypto currency market mature then there were different level of correlations between individual cryptocurrencies starts to diverge and factors behind divergence was development of unique features and option of market and are particular news about project and with result of it correlation between STEEM, BTC and ETH becomes more stronger.
I can also give an example about that during the period of market optimism and positive sentiment we observed high level of correlation between STEEM BTC and ETH so it means that when Bitcoin and Ethereum price was increasing then STEEM price was also pumping so this level of positive correlation was a suggestion that this is a token which is going to influenced by broader market trends and sentiment.
In the second scenario which is opposite to it is important to not that when there was time of economic unstability and market uncertainty and in other words you can also say in the times of negative sentiment there was low level of correlation and negative correlation between BTC ETH and STEEM so it means that if BTC and ETH is going towards decline then there would be no effect on STEEM so it's price can pump rather than declining. In this case the negative correlation and low level of correlation is an indication that that STEEM has its own particular characteristics and features which is differentiating it with the broader market.
There could be several insights that traders can extract from the behaviour of STEEM in relation to broader market. So first understanding the correlation between STEEM token and with other cryptocurrencies could be very helpful for traders for analysing the over all risk exposure of their portfolios because if the positive correlation is existing in between STEEM and BTC, Ethereum then it suggest that price movements of these currencies is going to significantly impact the price of STEEM so in this case traders would closely monitor BTC and ETH for the anticipation of potential changes in the price of STEEM.
Where there is significant trading opportunity can also be analysed in a true way by traders and investors by understanding and observing a correlation between STEEM BTC and ETH. So if STEEM has a negative correlation with BTC and ETH in different market conditions then it would indicate that there are different unique features of STEEM char responsible for driving up its price movements so traders are free to analyse these factors like project specific news partnerships and rates of adoption for making informed decisions of any kind of investment in their future.
I want to invite here
@suboohi
@aaliarubab
@stef1
To participate 😊
Upvoted. Thank You for sending some of your rewards to @null. It will make Steem stronger.
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I agree with most of your points barring that constant reshuffling of the portfolio might help. In practical, I have seen that it fails the best estimates and acts against our expectations. Overall you have done a fairly nice job. My best wishes.
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I would say that your explanation of cross-asset correlation is clear and relatable. The use of examples, such as having stocks, bonds, real estates, and cryptocurrencies in a portfolio, makes it easier for readers like me to grasp the concept and its relevance in managing diverse assets.
You are right to put emphasise on diversification as a key risk management strategy . As I went through your post , I found that your examples , like stocks and bonds, gold and stocks, and real estate and stocks, effectively illustrate how assets with negative correlations can mitigate risks and enhance portfolio resilience.
I found that your discussion on historical correlation patterns between STEEM and major cryptocurrencies like Bitcoin and Ethereum, and how these correlations evolved over time, adds depth to the understanding of how STEEM behaves in relation to the broader market.
Wish you more success .
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The explanation of cross-asset correlation in your post is very clear and relatable. Your use of examples, such as the case of having stocks, bonds, real estate, and cryptocurrencies in a portfolio, helps readers understand the concept. This is an important notion for investors.
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@sahar78 Your breakdown of cross-asset correlation is super clear and applicable. Loved how you linked it to diverse assets especially in the crypto world. Your insights on market trends during bullish and bearish conditions are spot on. The examples you provided for effective risk management and diversification are practical and easy to understand. Exploring historical correlations with STEEM and other major cryptos adds depth to your analysis. Best of luck
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You have written so well how are you
I must say you have master the topic well and answered each question in detail
Well best of luck for the participation
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Thank you so much for sharing your post with this which is about cross asset correlation you tried your best to convey your maximum knowledge about this topic and this is looking very expensive but I think there is more quantity of content here rather than quality because I can see that there are very little real world examples you have explain with over all it is giving a good understanding in general way I wish you success in this engagement challenge
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Hello friend thanks for such awesome content friend, I really appreciate how you broke down the term into smaller, please keep it up. Correlation is a very good idea or tool that could help any trader generate profit over a short period of time.
Thanks for sharing wishing you success and prosperity please also comment on my entry too
https://steemit.com/hive-108451/@starrchris/eng-esp-steemit-crypto-academy-contest-s16w1-cross-asset-correlation-analysis
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