According to data provider Kaiko, Bitcoin and Ethereum, the two largest cryptocurrencies by market capitalization, have become less interdependent, with their correlation falling below 80% for the first time since November 2021. This indicates that their prices move in different directions more often and there is a shift in their relationship. Here are the details…
A first in a long time in Bitcoin and Ethereum
In March, Coinbase analyzed the correlation between BTC and ETH returns and concluded that the correlation dropped from mid to late March as Bitcoin outperformed other cryptocurrencies due to turmoil in the US banking industry and increased regulatory scrutiny of non-Bitcoin cryptocurrencies. The decline in this relationship, however, became more pronounced in the days following the Shanghai (Shapella) fork in ETH, reminiscent of a similar trend observed during the Merge in September 2022 when Ethereum changed its consensus mechanism to proof-of-stake.
The falling correlation strengthens the diversification situation by theoretically incorporating both assets into an investment portfolio. According to the data, as of now, Bitcoin and Ethereum prices have increased by around 62 percent and 50 percent, respectively, in 2023. Bitcoin, the world’s largest cryptocurrency, was created in 2009 as a decentralized cryptocurrency that can be used for peer-to-peer transactions without intermediaries. Launched in 2015, Ethereum is a decentralized Blockchain platform that enables smart contracts and decentralized applications to be built on top of it.
Why did the correlation rate drop?
Both Bitcoin and Ethereum have faced their own fair share of challenges over the years, from scalability issues to regulatory scrutiny. However, they remain the two most popular and widely used cryptocurrencies in the world, with a combined market capitalization of over $700 billion. The recent decline in the correlation between Bitcoin and Ethereum prices is remarkable. Because these two cryptocurrencies have historically been highly correlated.
However, as the cryptocurrency market continues to mature and evolve, it is becoming increasingly clear that Bitcoin and Ethereum are not the only games in town. There are now thousands of other cryptocurrencies and Blockchain platforms, each with their own unique features and use cases. As investors become more aware of the benefits of diversification and the “potential risks of putting all their eggs in one basket,” we are likely to continue to see a decline in the correlation between Bitcoin and Ethereum prices, as well as other cryptocurrencies and Blockchain platforms.
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