# Correlation Between XRP and Bitcoin

##### Specify exactly 2 symbols:
Can any of the company-specific risk be diversified away by investing in both XRP and Bitcoin at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining XRP and Bitcoin into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between XRP and Bitcoin, you can compare the effects of market volatilities on XRP and Bitcoin and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in XRP with a short position of Bitcoin. Check out your portfolio center. Please also check ongoing floating volatility patterns of XRP and Bitcoin.

## Diversification Opportunities for XRP and Bitcoin

 0.74 Correlation Coefficient

### Poor diversification

The 3 months correlation between XRP and Bitcoin is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding XRP and Bitcoin in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bitcoin and XRP is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on XRP are associated (or correlated) with Bitcoin. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bitcoin has no effect on the direction of XRP i.e., XRP and Bitcoin go up and down completely randomly.

## Pair Corralation between XRP and Bitcoin

Assuming the 90 days trading horizon XRP is expected to under-perform the Bitcoin. In addition to that, XRP is 1.77 times more volatile than Bitcoin. It trades about -0.1 of its total potential returns per unit of risk. Bitcoin is currently generating about -0.12 per unit of volatility. If you would invest  6,999,022  in Bitcoin on January 23, 2024 and sell it today you would lose (501,101) from holding Bitcoin or give up 7.16% of portfolio value over 90 days.
 Time Period 3 Months [change] Direction Moves Together Strength Significant Accuracy 100.0% Values Daily Returns

## XRP  vs.  Bitcoin

 Performance
 Timeline
 XRP Correlation Profile

### 2 of 100

 Weak Strong
Weak
Compared to the overall equity markets, risk-adjusted returns on investments in XRP are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, XRP may actually be approaching a critical reversion point that can send shares even higher in May 2024.
 Performance Backtest
 Bitcoin Correlation Profile

### 18 of 100

 Weak Strong
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Bitcoin are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, Bitcoin exhibited solid returns over the last few months and may actually be approaching a breakup point.
 Performance Backtest

## XRP and Bitcoin Volatility Contrast

 Predicted Return Density
 Returns

## Pair Trading with XRP and Bitcoin

The main advantage of trading using opposite XRP and Bitcoin positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if XRP position performs unexpectedly, Bitcoin can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Bitcoin will offset losses from the drop in Bitcoin's long position.
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The idea behind XRP and Bitcoin pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.
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