Binance Coin and Stablecoins: On the Search for Low Correlation
Investors have a specific set of traits they look for in their target investments. It can be a certain industry, size, or business model, but they usually have a set list of characteristics they’re looking for. One great example of these characteristics is correlation.
Correlation refers to the amount that two values move together. Negative correlation says they move opposite, positive means they move together, and a correlation close to zero says they are unrelated.
One of the top appeals of Bitcoin as an investment is the low correlation it has with nearly every other investment class. There is nothing that moves quite like it, so Bitcoin becomes a great hedge. It doesn’t hurt that Bitcoin also has a high level of volatility, which makes profits (or losses) more likely.
But what many don’t think about is how to benefit from low correlation within the cryptocurrency space. A large proportion of cryptocurrencies have a high correlation with Bitcoin. They move almost in sync. There’s a reason why the Bitcoin crash is treated as synonymous with the crypto or ICO crash.
Once you’re into Bitcoin, you have sufficiently diversified out of all the other asset classes (equities, bonds, and real estate). So why take it any further? If they all move with generally the same patterns, wouldn’t it be easier to stick to the coin that is the most liquid?
Binance Coin’s Low Link to Bitcoin
There are actually a few coins that have a low correlation with Bitcoin. First, we have BNB, or Binance Coin. BNB can be exchanged for transaction fees on Binance, which gives it an inherently unique intrinsic value. Until recently, it moved similarly to Bitcoin, but in the last 3 months, it has gone up nearly 150%!
It is now even rated the 7th highest in terms of market capitalization. In a way, this is just a very strong testament to how well Binance is doing, and acts like an equity in the company.
Bitcoin hasn’t even gone up 5% this year, and Binance Coin is dwarfing it with its massive growth. So this is one example of a coin that breaks away from the pack which is generally tied too tightly to Bitcoin.
So one investment strategy could be to look for coins that have a fundamental value which can be seen as definitively separate from Bitcoin. Ideally, these are the coins that will break away and show low correlation with Bitcoin.
Stablecoins as a Safe Play
The other example of a coin that doesn’t move with Bitcoin is Tether. Yes, it is a stablecoin, but it can also be a great way to hedge against swings in other cryptocurrencies. A safe haven of sorts. And when you think things are going south, the best place to be is Tether. People forget that this is still a cryptocurrency and if you think about the idea of selling US dollars to buy Tether, that could be a winning (and profitable) trade.
So there are two investment strategies which are easy to implement and have the potential for either breakout success, or at least helping you avoid ruin. Analyzing the way coins and the whole ecosystem is links is the best way to continually isolate trends and act on them.
Disclaimer: The author owns Bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
Featured image courtesy of Shutterstock.