Bitcoin and Ethereum are the two most prominent cryptocurrencies today. Historically, Ether’s value has moved in tandem with Bitcoin’s, following suit when Bitcoin rises or falls. However, this relationship appears to be changing.
A closer look at recent price trends shows that Bitcoin experienced a remarkable 60% surge in 2023. (This rally has mainly been attributed to speculation surrounding the approval of a Bitcoin Exchange-Traded Fund (ETF) by the US Securities Exchange Commission.)
In comparison, Ether’s rise was a more modest 50% during the same period, according to data from The Block. This is despite the fact that Ether has shown bullish momentum, and its price rallied above $1600.
Bitcoin and Ether’s Decoupling Dynamics
Usually, the prices of most cryptocurrencies tend to change at the same time, and this phenomenon is measured using a correlation metric. Correlation measures how closely the prices of two assets move together.
When the correlation between two assets is low, their prices move in opposite directions more often. And it indicates a weaker connection between the two assets.
A Binance Research study showed an average correlation between the leading altcoins by capitalization in 2019 was 0.7. In 2020, it was 0.8. This means that in 70% of cases, cryptocurrencies such as Ether, Litecoin, EOS, XRP, Bitcoin Cash (BCH), and Binance Coin (BNB) grew and fell simultaneously.
The correlation between the prices of Bitcoin and Ether dropped below 80% for the first time since November 2021, indicating a significant change in the relationship between the two largest cryptocurrencies. According to data provider Kaiko, the rolling 30-day correlation between Bitcoin and Ether has fallen to about 78%. This means that the prices of BTC and ETH are not moving together as closely as they used to.
The weakening price correlation indicates growing independence between the two largest cryptocurrencies. Their prices are moving in different directions more frequently.
In the past, there have been brief periods where Ether has decoupled from Bitcoin. However, this time, the price decoupling may be long-lasting.
Effects of Ethereum’s Developmental Efforts
Ethereum has distinguished itself as an ever-developing blockchain network. The network is constantly evolving and introducing new paradigms to the wider ecosystem. Notably, it revolutionized the blockchain world by introducing smart contracts and decentralized applications (dApps). This transformative move is only second to the creation of Bitcoin itself, and played a major part in how Ether rose through the ranks of top cryptocurrencies to stand alongside Bitcoin.
Ethereum’s latest development move, the Shappella upgrade, in particular has played a pivotal role in reshaping the traditional correlation between Bitcoin and Ether. The upgrade incentivizes staking and locking Ether and, thus, reduces its circulating supply faster than Bitcoin.
Bitcoin’s programmed halving of mining rewards every four years reduces its supply expansion over time slower than Ether’s new mechanism. Thus, Bitcoin is more likely to continue to be driven more by macro factors like inflation and institutional investment flows.
With different factors driving their prices, Bitcoin and Ethereum may start decoupling and behaving more like separate asset classes. This could increase trading opportunities between BTC and ETH.
Implications of the Decorrelation: Diversification
As the relationship between Bitcoin and Ethereum continues to evolve, the impact on investment strategies remains a focal point of discussion.
A lower correlation between Bitcoin and Ether emphasizes the importance of diversification. This allows investors to balance positions and manage overall risk more effectively. Unlike previous years, where most cryptocurrencies moved in sync, the changing dynamics provide an opportunity for strategic portfolio diversification.
Analysts stress the significance of aligning with Bitcoin’s upward momentum, particularly in light of the anticipated spot Bitcoin ETF. The decreasing correlation between the top two cryptocurrencies supports the case for including both in an investment portfolio.
Final Thoughts: Outlook for Bitcoin and Ethereum
Though Ether strives for greater independence, its momentum remains intertwined with Bitcoin’s, at least for now. The current uptrend in Ether’s value is closely tied to Bitcoin’s trajectory.
News of a potential Bitcoin ETF approval and a more lenient regulatory stance by the SEC led to a collective spike in major cryptocurrency prices, reaching as high as a 13% increase. Both Bitcoin and Ether witnessed a positive turn, with Bitcoin surpassing $30,000 and Ether crossing the $1,600 mark.
If ETF anticipation continues fueling Bitcoin’s rise, Ether could also trend higher to test the critical $2500 resistance level. But pullbacks are likely as traders take profits from the recent upswing.
Nonetheless, this intricate dance between Bitcoin and Ethereum, influenced by technological upgrades and market dynamics, will definitely impact the larger cryptocurrency landscape.
Their ongoing shift in dynamics suggests that Ethereum is carving out greater independence from Bitcoin, and the future may witness further decoupling as Ethereum asserts its path.
However, beyond market dynamics, geopolitical instability adds another layer of complexity. The ongoing global uncertainties have the potential to reshape investor behaviour. If Bitcoin becomes perceived as a “rush to safety” trade, it could introduce a new paradigm.
Disclaimer: This piece is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
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