Why Analysis Of Correlation Is Important In Cryptocurrency Prices

So far, I have been into the analysis of crypto price between Bitcoin, Leo, hive, Solana et al, it has been a better way to play with those data gotten from coingecko.
Not only playing with the data but analysing and deriving meaningful interpretation from it.

This article presents why correlation analysis between token is very important. In the course of this article, I shall tend to explain in details what correlation analysis is all about, requirement for correlation analysis, and how to carryout out the analysis with interpretation.

Of course we all know that in a real world, Bitcoin is the leader of all cryptocurrencies in the world.

Photo Source - coinmarketcap.com

That is to say when the price of bitcoin experience a bullish, crypto prices may likely experience a bullish too, when the price of bitcoin lies in the bearish chart other cryptocurrencies will also follow likewise.

This is an example of relationship analysis but the difference between the obvious analysis and that proven with a software is in interpretation.

What is correlation analysis?
Correlation Analysis is a test mearnt to read the level of relationship between variables that occurs in a process.

The price of bitcoin and that of hive is an example of a variable. They tend to occur in everyday life chart of thier prices.

Correlation analysis was invented by Karl Pearson, a statistician. He first of all measured the value of correlation otherwise known as correlation coefficient.

Before you can measure the value of correlation, it is very important to understand the basics.

Here are the basics of carrying out correlation test.
It is very essential to take note of the following before carrying out a correlation test.

Positive correlation
A positive correlation indicates that from the bivariate variables you wish to find thier relationship, as the price of one increases the price of the other increases.

Example I collected data from coingecko concerning the price of Leo token and hive.

Here is Leo

Photo Source - coinmarketcap.com

Here is hive

Photo Source - coinmarketcap.com

If the coefficient of correlation is positive, it simply means that as the price of Leo increases, the price of Solana will also increase. Hence it tends towards the positive one axis.

Negative correlation
A negative correlation indicates that from the bivariate variables you wish to find thier relationship, as the price of one increases the price of the other decreases.

Example I collected data from coingecko concerning the price of Leo token and Solana.

Here is Leo
Here is Solana

If the coefficient of correlation is negative, it simply means that as the price of Leo increases, the price of Solana will also decrease. Hence it tends towards the negative one axis.

Zero correlation
A zero correlation indicates that from the bivariate variables you wish to find thier relationship, as the price of one increases the price of the other will neither increase or decrease. Meaning that there is no relationship at all.

Example I collected data from coingecko concerning the price of Leo token and Solana.

Here is Leo
Here is Solana

If the coefficient of correlation is zero, it simply means that as the price of Leo increases, the price of Solana will not also increase or decrease and vice versa. Hence it tends towards the zero axis.

After understanding these basics, you can proceed to collect the data into a data analysis software. I do use SPSS though.

Check the scatter plot of the diagram. Some go as far also to check for normality of variables which is also good too.
Here is what a scattered dot diagram looks like.

Taken With Desktop Computer

Analyze and Interpret
From the test, what can you say that has been the past relationships between tokens and of what strength is it.
The result is always in the format below.

Taken With Desktop Computer

Conclusion
This article has been able to present why it's important to carryout analysis of correlation between price of cryptocurrencies. It helps us to know the progress of the coin in relationship with bitcoin and in the nearest future what are we expecting it to look like.

This will help investors on long term investment plan also refered to as the hodl.