Decoupling ahead? Bitcoin and Ethereum may finally snap their 36-month correlation

Decoupling ahead? Bitcoin and Ethereum may finally snap their 36-month correlation

Averaging daily returns of 6% to 10%, Bitcoin and Ethereum have been decoupling for the past 36 months. While we’ve seen some correlation between the two (particularly in late 2017), we’re now approaching their price correlation at a higher level. Are they about to break out of their 36-month correlation?

After months of strong performance, Bitcoin and Ethereum have finally broken their long-term correlation . While the two assets have been highly correlated for at least the past 3 years, Bitcoin has been showing a relative strength in August, while Ethereum has been showing relative weakness. This may be a sign that the two assets are decoupling ahead.

Last year marked the 36th consecutive month of weekly growth for the price of bitcoin. While that sounds like a long streak, it’s actually still a very short period of time by historical standards, as the cryptocurrency’s price has been trending upward for decades by this metric. That said: the price of bitcoin hit a new all-time high earlier this month, rising to nearly $18,000 before falling back to around the $16,000 region. And while bitcoin’s price has been rising for years, the price of its closest rival, ether, has only been rising for a year. But lately, bitcoin and ether’s prices have been following a similar trajectory—both hit new highs in June, and they’ve been following each other ever since. Read more about bitcoin options expiry april 2021 and let us know what you think.

In 2020, Anish Saxena, a New Delhi-based car salesman, earned “amazing” profits by investing in cryptocurrency, just as his company was struck by the coronavirus pandemic-induced shutdown.

“I’d known about Bitcoin and Ethereum, as well as dozens of other assets, for years,” the 33-year-old entrepreneur said. “However, I was only able to invest in them when the lockdown forced my family and me out of work. And that made a huge difference in our ability to survive.”

Anish stated that Bitcoin (BTC) and Ether (ETH) accounted for approximately 80% of his investment portfolio, with the remainder split between Polygon, Dogecoin (DOGE), and Chainlink (LINK). Anish refused to disclose the amount of money he made from his crypto-only investment. 

He did note, however, that by choosing not to sell before of the May 2021 collapse, he nearly lost half of his unrealized gains.

“I was liquidating bitcoins depending on the need for cash in my family,” Anish said. “While I am still profitable, seeing my earnings drop by more than half has led me to convert a significant part of my assets to cash.”

Correlation dangers

Over-reliance on two of the most popular cryptocurrencies, Bitcoin and Ether, has put retail traders like Anish under pressure.

Both digital assets tend to move in the same direction, notwithstanding their differences in terms of economics and use cases. Their losses and gains seemed to be well-synchronized in recent history, indicating that their owners may see their assets rise quickly during bull trends but risk losing a lot when the upswing exhausts and turns to the negative side.

“Having two cryptos that are strongly linked with one another increases risk to the portfolio if it is a pure crypto portfolio,” said Simon Peters, a crypto analyst at multi-asset brokerage eToro.

“While the portfolio could see exceptional performance one month with the two cryptos making gains in tandem, you could also see huge drawdowns in a bad month as the cryptos move lower together.”Decoupling ahead? Bitcoin and Ethereum may finally snap their 36-month correlationThe realized correlation between Bitcoin and Ethereum seldom dropped below 50% in the previous three years. Source: Skew

Bitcoin and Ethereum, on the other hand, are referred to as liquidity backstops for crypto traders by Liam Bussell, head of corporate relations at Banxa, a fiat-to-crypto gateway provider.

Traders use their early gains in the top two cryptocurrency markets to invest in mid and lower-cap digital assets, according to the CEO, highlighting rallies in Dogecoin and across non-fungible token projects. He added:

“Once the market begins to slow, traders try to move back to liquid assets like BTC and ETH. This can offset declines for a short time but can’t maintain the market indefinitely. There are gains to be made in bear markets, but it is volatile coins, and the risk is high.”Decoupling ahead? Bitcoin and Ethereum may finally snap their 36-month correlationBitcoin and Ethereum trends throughout the history. Source: TradingView.com

Peters also encouraged traders and investors to hedge their crypto investments by investing a significant part of their money in conventional financial instruments such as equities, commodities, and fixed-income securities/funds.

“Historically, cryptocurrency has proven to be relatively uncorrelated to other asset classes and to provide superior risk-adjusted returns,” the analyst said.

Are we on the verge of decoupling?

Meanwhile, Peters cautioned that the Ethereum network’s shift from proof-of-work to proof-of-stake, dubbed Ethereum 2.0, may restrict the network’s connection with Bitcoin.

Deflation is one of the major features included in the forthcoming Ethereum blockchain update. The Ethereum improvement proposal, dubbed EIP-1559, aims to burn a part of transaction fees received from consumers.

According to crypto education website Coinmonks, this may remove at least a million ETH tokens from circulation each year, making the currency scarcer. 

Bitcoin shows a comparable scarcity by halving its freshly issued supply rate every four years. A total of 21 million tokens are available in the coin.

Related: Ethereum’s London split hits testnet, causing a delay in the difficulty bomb

“A decoupling between bitcoin and ether may occur after the completion of the 2.0 transition as the ‘tokenomics’ — how ETH operates on the 2.0 blockchain will be different than it is now,” Peters stated, adding that:

“Demand for ETH may fluctuate based on current staking incentive yields, driving the price of ETH higher or down independently of other cryptos.”

Anish, on the other hand, said that he would “HODL” a part of his BTC and ETH.

“I’m going to invest regularly across Bitcoin, Ethereum, gold, and mutual funds once business starts up again following a complete economic reopening,” he said.

The author’s thoughts and opinions are entirely his or her own and do not necessarily represent those of Cointelegraph.com. Every investing and trading choice has risk, so do your homework before making a decision.

Despite their shared history and common themes, Bitcoin and Ethereum have never been especially correlated—until now. Last week, the two cryptocurrencies finally broke the 36-month correlation that has existed between them since the start of 2017. Even then, it could only last for a brief period of time before returning to its previous state.. Read more about bitcoin news and let us know what you think.

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