Limits of diversification
Why can holdings that usually move differently all fall together in one stressful week?
In plain words
Diversification means spreading risk across assets that do not move in lockstep, so losses in one are cushioned by others. Its limit is that correlations between assets can rise towards one during sharp stress weeks, when a single broad move pulls nearly everything in the same direction at once.
Why it matters
Risk plans built on average correlation assume holdings will offset each other. When that assumption fails, the portfolio falls more than the individual positions suggest, so the true exposure is to the shared market move rather than to any single holding.
In a real week: ETH, week of 22 June 2026
In the week of 22 June 2026, BTC and ETH moved in the same direction with an hourly correlation of 0.94, labelled very close. ETH returned -7.91% against BTC, finishing 2.01 percentage points lower, and the ETH/BTC ratio fell 2.13%. Two large holdings offered each other almost no cushion that week, and ETH's larger move still set the deeper loss.
A common mistake
Assuming a correlation measured in calm periods will hold in a selloff. Correlations are estimates over past windows and typically firm up when markets move fastest.