What Does Lower Bitcoin-Ether Correlation Mean for Investments?
Prices of bitcoin and ether—the two largest cryptocurrencies by market capitalization—are usually closely correlated, but that's changing after Ethereum's Shanghai Upgrade, and it could affect investments and risk management for cryptocurrency investors.
According to a recent report by Coinbase, the correlation between bitcoin (BTC) and ether (ETH) has been declining since the beginning of 2023 and the rift widened after Ethereum's Shanghai (Shapella) hard fork. 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 fallen 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 increasing adoption 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-stake (PoS) consensus mechanism.
Lower BTC-ETH correlation could have implications for portfolio diversification and risk management. For institutional investors, it could mean a change in their hedging strategies.
«The relevance of this falling 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 liquid altcoins),» said Coinbase analysts.
For investors who want to gain exposure to the cryptocurrency market, holding both BTC and ETH could provide more benefits than holding either one alone, as they could reduce the overall volatility and increase the potential returns of their portfolio.
However, the report cautions that
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