What does a lower Bitcoin-Ether correlation mean for investments?

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The prices of bitcoin and ether, the two largest cryptocurrencies by market capitalization, are generally closely correlated, but this changes after the Ethereum upgrade in Shanghai, and it could affect investments and management. risks for cryptocurrency investors.

KEY POINTS TO REMEMBER

Ether and bitcoin have evolved together in the past, with the exception of the period around The Merge. The lack of correlation increased after the Ethereum hard fork in Shanghai (Shapella). At the same time, bitcoin continued its correlation with the Nasdaq. The Correlation Between Ether and Bitcoin

According to a recent Coinbase report, the correlation between bitcoin (BTC) and ether (ETH) has been declining since the beginning of 2023 and the gap has widened after the Ethereum hard fork in Shanghai (Shapella). 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 fell from 0.95 to 0.82 during this period. In the past, these two crypto assets have mostly evolved in parallel.

The report attributes this trend to several factors, such as the growing adoption of Ethereum-based decentralized applications (DApps), the growing popularity of non-fungible tokens (NFTs), and the network’s transition from proof-of-work (PoW). a proof-of-stake (PoS) consensus mechanism.

How the Falling Correlation Affects Investments

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

“The relevance of this decreasing correlation for institutional investors is that it can affect quantitative strategies that rely on cross-hedging one asset for the other (or using ETH as a hedge for less liquids),” the Coinbase analysts said.

For investors looking to gain exposure to the cryptocurrency market, holding both BTC and ETH could offer more advantages than holding either alone, as they could reduce overall volatility and increase trading. potential returns on their portfolio.

However, the report cautions that the correlation is not a static measure and could change over time depending on market conditions and the evolution of the two networks.

Bitcoin still correlated with the Nasdaq

Bitcoin is often touted as an inflation hedge and a safe haven asset in times of economic turmoil. However, recent analysis by CoinDesk shows that the cryptocurrency’s correlation to the ratio of the Nasdaq 100 to the S&P 500 index has increased significantly since late 2020, suggesting that bitcoin may be more sensitive. to changes in market sentiment and risk appetite than previously thought.

The Nasdaq 100 to S&P 500 ratio reflects the relative performance of growth stocks versus value stocks. Growth stocks are generally associated with higher earnings growth potential and higher valuations, while value stocks are considered undervalued and often pay dividends.

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

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