Portfolio Correlation Risk

Portfolio correlation risk is the danger that assets within a portfolio will move in the same direction during a market downturn, negating the benefits of diversification. In crypto, assets often exhibit high correlation, especially during periods of broad market stress.

When all assets drop simultaneously, the collateral value across the entire portfolio decreases, increasing the risk of widespread liquidation. This risk is often overlooked by traders who assume that holding different tokens provides protection.

Managing this requires a sophisticated understanding of cross-asset dynamics and the impact of systemic shocks on asset pricing.