What Does The Low Bitcoin-Ether Correlation Mean for Investing?

cryptocurrencies 

The prices of bitcoin and ether – the two largest cryptocurrencies by market capitalization – are usually closely correlated, but this is changing after Ethereum's Shanghai upgrade, and this could affect investing and risk management for cryptocurrency investors. Is.

Key TakeAways

• Ether and bitcoin have moved together in the past, with the exception of the time period surrounding the merger.

• The lack of correlation increased after the Shanghai (Shapela) hard fork of Ethereum.

• At the same time, bitcoin continues its correlation with the Nasdaq. {alertSuccess}

Ether And Bitcoin Correlation

According to a recent Coinbase report, the correlation between Bitcoin (BTC) and Ether (ETH) has been declining since the beginning of 2023 and the rift has widened following the Shanghai (Shapela) hard fork of Ethereum. The upgrade, completed on April 12, allowed users to withdraw staked ether for the first time.

The BTC-ETH correlation based on a 40-day rolling window has dropped from 0.95 to 0.82 during that time. In the past, these two crypto assets have mostly moved lockstep.

The report attributes this trend to several factors, such as the growing acceptance of Ethereum-based decentralized applications (DAPPS), the growing popularity of non-fungible tokens (NFTs), and the transition of the network from a proof-of-work (PoW) to a proof-of-work (PoW). -For Point-of-Stake (PoS) consensus mechanism.

How Decreased Correlation Affects Investing

The low BTC-ETH correlation may have implications for portfolio diversification and risk management. For institutional investors, this could mean a change in their hedging strategies.

“The relevance of this falling correlation for institutional investors is that it could impact quantitative strategies that involve cross-hedging one asset against another (or using ETH as a hedge against less liquid altcoins),” said Coinbase analysts. ) rely on."

For investors looking to gain exposure to the cryptocurrency market, holding both BTC and ETH can provide greater returns than holding either one, as they can reduce overall volatility and increase the potential returns of their portfolio. can increase.

However, the report cautions that the correlation is not a static measurement and can change over time depending on market conditions and developments in both networks.

Bitcoin is Still Correlated with Nasdaq

Bitcoin is often seen as a hedge against inflation and a safe haven asset in times of economic turmoil. However, a recent CoinDesk analysis shows that the cryptocurrency's correlation with the ratio of the Nasdaq 100 to the S&P 500 index has increased significantly since late 2020, suggesting a shift in bitcoin market sentiment and a higher risk than previously expected. May be more sensitive to risk appetite.

The NASDAQ 100 to S&P 500 ratio shows the relative performance of growth stocks versus value stocks. Growth stocks are typically associated with high earnings growth potential and high valuations, while value stocks are viewed as undervalued and often pay dividends.

According to CoinDesk, bitcoin's 90-day correlation coefficient with the Nasdaq-to-S&P 500 ratio reached an all-time high of 0.79 in March 2021, up from -0.06 in September 2020.