No matter which markets you choose, every proper investing strategy involves "the hedge." Because financial markets always have capital risk, no one is absolutely certain of their bets. Thus, hedging helps mitigate volatility that might occur in the primary investment.
(This article originally appeared on Crush The Street -- https://crushthestreet.com/articles/breaking-news/litecoin-perfect-cryptocurrency-hedge)
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One of the most common hedges for stock market investors is gold. Typically, as the equity markets rise, investors see little need for safe-haven assets like gold and silver. But if equities falter, a rush to safety occurs. Gold often soaks up this capital outflow, which makes it an ideal hedge against the benchmark financial indices.
But what about the cryptocurrency markets? Such vehicles are often considered a hedge against both traditional investments like index ETFs, and standard safe-haven assets. But what hedges popular blockchain currencies like bitcoin or ethereum?
The answer is litecoin! For the most part, blockchain coins have a strong, direct correlation with bitcoin. This simply means that as bitcoin rises, so too does other cryptocurrency assets. When bitcoin falls, it tends to take down other cryptos.
And no matter how many times alternative offerings like ethereum attempt to "de-lever" themselves from bitcoin, the hard numbers don't lie. For example, ethereum has a 52.6% correlation with bitcoin over the trailing month. Popular altcoins Steem and Dash are even more directly correlated at 73.5% and 84%, respectively.
Essentially, whenever bitcoin experiences any choppiness or volatility, many other cryptocurrency assets follow suit. This is particularly unfortunate when bitcoin runs into its own unique, fundamental challenges. For example, the scaling issue which threatened a softfork was a bitcoin-centric problem. Yet it negatively impacted so many cryptos that had nothing to do with scalability.
A notable exception is litecoin. At 39% correlation over the trailing month, litecoin has a weak statistical relationship with bitcoin. It may respond to the king of cryptos' movements, or it may not. As we have seen throughout June and most of July, litecoin is independent of bitcoin.
For those seeking a hedge within the blockchain markets, litecoin is an astute choice. While other coins were tanking under a softfork threat that didn't directly involve them, litecoin trading remained comparatively robust.