Decorrelation
What happens when two assets that usually move together start moving apart, and how can you see it in one week?
In plain words
Decorrelation is a drop in the usual co-movement between two assets. Instead of rising and falling together, one moves while the other does the opposite or nothing. It is measured by a correlation coefficient: near one means they move together, near zero means no link, and below zero means opposite directions.
Why it matters
Many positions assume that a hedge in one asset will offset a loss in another. When that link breaks, the hedge stops working exactly when it is needed, and losses appear in a portfolio built on the assumption that the two assets behave as one.
In a real week: BTC, week of 8 January 2024
In the week of 8 January 2024, BTC fell 5.0% while ETH outperformed it by 16.32 percentage points, and the ETH/BTC ratio rose 17.18%. Hourly correlation between the two was 0.52. A portfolio that had treated ETH as a stabiliser for BTC would have seen both the ratio and the expected offset move against it.
A common mistake
Assuming two correlated assets stay correlated in every market phase. A single correlation number summarises past moves; the relationship can weaken in the exact week a position needs it most.