Correlation Basics

What correlation is measuring, what the numbers mean, and why “high” can still be misleading.

The Scale: -1 to +1

• +1: moves together perfectly (rare in practice)
• 0: no consistent linear relationship
• -1: moves in opposite directions perfectly (also rare)

Correlation Is About Returns, Not Prices

Correlation is typically computed on returns (daily % changes), not raw prices. Two assets can both trend upward over years and still have low day-to-day correlation.

Window Choice Changes the Answer

A 7‑day window can look wildly different from a 90‑day window. Short windows react quickly but can be noisy; longer windows are smoother but can hide regime shifts.

Why Crypto Correlations Often Rise in Stress

In sharp drawdowns, liquidity matters more than narratives. When participants de‑risk at the same time, many assets become more correlated as they are sold together.