What correlation can answer
Diversification means spreading exposure across different risk drivers, not merely adding more names. Several tokens can move together when they depend on the same liquidity, ecosystem, or investor flows.
Align returns and time periods
Correlation is a statistical reference for how similarly assets moved over a period. Low historical correlation may disappear during stress, illiquidity, or a broad market selloff.
Diversification and its limits
Record use cases, supply schedules, exchange and bridge dependence, holder concentration, and cash needs. Technical, counterparty, and regulatory risks can overlap even when price charts look different.
Co-movement during drawdowns
The important question is how many independent risk sources exist, not how many tokens are held. Test scenarios in which one shared assumption changes.
A hypothetical portfolio
Two hypothetical tokens may show low correlation over the past 90 days, yet look more alike over a year or during a sharp drawdown. Correlation depends on the period and whether returns are measured daily or weekly. Tokens in one ecosystem may share collateral, exchange liquidity, and investor risk appetite despite different names.
Check assumptions and data
Assess volatility, maximum drawdown, liquidity, exchange and custody exposure, and portfolio weights alongside correlation. A low historical correlation does not prevent losses or guarantee principal. Record the price sources used and how missing or delisted observations are handled.