Ethereum decouples from Bitcoin: Examining the causes
- The decoupling was most likely due to an increase in spot ETH ETF launches.
- A lower BTC-ETH correlation made a case for portfolio diversification.
Bitcoin’s [BTC] correlation with Ethereum [ETH] dropped to multi-year lows, signaling a major divergence in the growth trajectories of the two blue-chip cryptocurrencies.
Based on a 60-day rolling window, the correlation dipped to 75% in November, according to crypto market data provider Kaiko. This was a marked departure from the all-time highs (ATH) of 97% seen during the end of 2022.
Source: Kaiko
Ethereum weakens its relationship with Bitcoin
AMBCrypto spotted a vertical drop in the relationship since November. While there was no telling evidence, the decoupling seemed to be caused by an increase in spot ETH exchange-traded fund (ETF) launches.
The broader market bullishness was led by excitement over likely approvals of a dozen-odd spot Bitcoin ETF applications. This led to the start of the mid-October rally and by the time the month ended, BTC had accumulated gains of 26%.
However, ETH was slow to match this pace, finishing October with 17% gains.
Source: Santiment
However, the announcement of spot ETH ETFs by TradFi giants such as BlackRock and Fidelity turned it around for ETH in November. The second-largest crypto bounced above the crucial barrier of $2,000 for the first time since May 2022.
To put it simply, ETH reacted more to developments in its own ecosystem rather than a trickle-down effect.
It is important to understand that both assets function very differently from each other.
Notably, Ethereum is used as a platform for the development of decentralized applications (dApps) and smart contracts. Meanwhile, Bitcoin is primarily used as a store of value and a means of payment.
What is the takeaway for investors?
As per a 21 April report by Coinbase, the lower BTC-ETH correlation makes a case for portfolio diversification, as holding both assets can result in higher returns.
Smart investors spread their investments across different cryptos, reducing their exposure to any one category.
Read Bitcoin’s [BTC] Price Prediction 2023-24
As for institutional investors, the trend could impact their trading strategies like cross-hedging. For the curious, cross-hedging is a practice of managing risk by investing in two assets that have similar price movements but are not perfectly correlated.
Having said that, traders and investors should not take these as investment advice, and instead perform their due diligence.
