Bitcoin-Ether Correlation Plummets, Investors Panic

Key Points:

• Bitcoin-ether correlation dips below 80% for first time in 18 months, indicating a significant shift in the relationship between the two largest cryptocurrencies.
• The rolling 30-day correlation between bitcoin and ether dipped to about 78% this week, according to data provider Kaiko.
• A falling correlation between two assets reinforces the case for diversification by including both assets in an investment portfolio.

The correlation between the prices of bitcoin and ether, the two largest cryptocurrencies, has recently fallen below 80% for the first time since November 2021, indicating a significant shift in their relationship.

According to Kaiko, a data provider, the rolling 30-day correlation between bitcoin and ether has dipped to about 78% this week. Correlation measures how closely the prices of two assets move together. When the correlation is low, it means their prices are moving in different directions more often. In other words, the falling correlation means that BTC and ETH prices are not moving together as closely as they used to.

This change in correlation can be explained by a number of factors. Coinbase has analyzed the correlation between BTC and ETH returns and concluded that it has been falling since mid-to-late March. The exchange attributed this to bitcoin’s outperformance of other cryptocurrencies against the backdrop of U.S. banking sector turmoil and heightened regulatory scrutiny on non-bitcoin cryptocurrencies.

However, the decline of the relationship between bitcoin and ether has become more pronounced in the days following the Shanghai (Shapella) fork, reminiscent of a similar trend observed in September 2022 during the Merge (when Ethereum changed its consensus mechanism to proof-of-stake). Coinbase noted this trend at the time and suggested that it could be the result of a number of factors, including market volatility and investor behavior.

Theoretically, a falling correlation between two assets reinforces the case for diversification by including both assets in an investment portfolio. Investors who hold both bitcoin and ether may benefit from the lower correlation as it could help to reduce the overall risk in their portfolio. Moreover, the lower correlation could indicate that the two cryptocurrencies are becoming more independent of each other, which could provide new opportunities for investors to profit from the differences in their performance.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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