Concept · example: BTC, week of 20 July 2020

Relative value

What can you learn by pricing one asset against another instead of judging it alone?

In plain words

Relative value is judging an asset by how its price moves compared with another asset, rather than by its own price alone. Traders often use the ratio between the two prices, and the correlation, which measures how closely their moves track each other, to make that comparison.

Why it matters

An asset can rise and still lose ground to the market or to a peer. Comparing the two separates a move driven by that asset from a move driven by conditions affecting both, which matters for anyone holding one and not the other.

In a real week: BTC, week of 20 July 2020

In the week starting 20 July 2020 (Mon), BTC returned 7.85% to close at 9931.54, but ETH beat it by 22.21 percentage points, and the ETH-BTC ratio rose 20.6%. Both moved in the same direction, yet their hourly correlation of 0.68 was labelled loose (below 0.7), so BTC's weekly gain looked strong on its own but lagged ETH over the same week.

A common mistake

Assuming two correlated assets always move together by the same amount. Correlation describes direction, not size; one asset can still outpace the other by a wide margin.

Related ideas

correlationratiobetaspread

Research notes on real market weeks, not investment advice. Sources: Binance spot BTCUSDT and ETHUSDT 1-hour candles and USD-M perpetual funding rates; weekly figures computed by WSTiger.

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