Pairwise Correlation Update

Amid recent market turbulence, we’ve revisited pairwise correlations - comparing the movements of tokens relative to other tokens in the top 100 and doing the same for stocks in the Nasdaq-100 index - and tracking how these relationships evolve. Since our last post on this subject in summer 2024, token correlations initially declined into year-end before rising again alongside Q1 geopolitical shocks.

However, the rise in correlations amongst tokens in the last few months has been more modest than the sharp rise seen in U.S. equities (proxied by the constituents of the Nasdaq Composite index / QQQ). Token correlations are already beginning to weaken, while equity correlations continue to climb.

As we’ve noted before, we see crypto’s return drivers as fundamentally different from other markets. The tremendous upside of Web3 is orthogonal to shorter term macro-driven market movements and, we believe, is much less impacted by the breakdown of global free-trade principles that have riled other markets.

While token correlations remain relatively high, we believe the market will continue to reward fundamentally strong projects. The era of indiscriminate rallies is fading—selectivity matters more than ever.

The information herein is for general information purposes only, is not investment advice, and should not be used in the evaluation of any investment decision. An investment in digital assets involves a high degree of risk. Past performance is no guarantee of future results.