The Declining Correlation Between Bitcoin and Ethereum Returns: A Closer Look

According to reports, Coinbase stated in a research report that the correlation between Bitcoin and Ethereum returns has been declining since mid March. After the upgrade of Ethereum in Shanghai, the decline in this relationship became more apparent, and a similar trend appeared in September 2022 after the last update to Merge on the network. The weakening of the 40 day correlation in the daily return rate may continue for another two weeks, as the initial stage of Ethereum extraction remains valid after the upgrade.

Report: The decline in the correlation between Bitcoin and Ethereum may affect investors’ hedging strategies

As digital currencies continue to evolve, their relationships with one another is becoming more complex. This is particularly true for Bitcoin and Ethereum, two of the most popular and widely used cryptocurrencies. According to a recent research report by Coinbase, the correlation between Bitcoin and Ethereum returns has been declining since mid-March. In this article, we will take a closer look at this trend, and what it could mean for investors.

The Background

Bitcoin and Ethereum are both decentralized digital currencies that operate on blockchain technology. They both have their own unique characteristics and use cases, and are widely used for various applications in the global financial industry. One of the key differences between the two most popular cryptocurrencies is their mining process: Bitcoin uses the Proof-of-Work (PoW) consensus algorithm, while Ethereum uses the Proof-of-Stake (PoS) consensus algorithm.

The Declining Correlation

According to Coinbase, the correlation between Bitcoin and Ethereum returns has been declining since mid-March. After the upgrade of Ethereum in Shanghai, the decline in this relationship became more apparent, and a similar trend appeared in September 2022 after the last update to Merge on the network. The weakening of the 40 day correlation in the daily return rate may continue for another two weeks, as the initial stage of Ethereum extraction remains valid after the upgrade.
This declining correlation can be attributed to a number of factors. One possible reason is that the two currencies are increasingly being used for different purposes. Bitcoin is primarily used as a store of value, while Ethereum is used for a variety of applications, including decentralized finance (DeFi) and non-fungible tokens (NFTs).
Another factor is the difference in their mining processes. As mentioned earlier, Bitcoin uses PoW, which requires a lot of computational power to solve complex mathematical equations. This makes Bitcoin mining more energy-intensive and costly, and therefore less accessible to small-scale miners. Ethereum, on the other hand, uses PoS, which is less energy-intensive and more accessible to small-scale miners.

What It Means for Investors

For investors, the declining correlation between Bitcoin and Ethereum returns could mean that it is becoming less important to hold both currencies in a portfolio. In the past, holding both Bitcoin and Ethereum was seen as a way to diversify one’s portfolio and minimize risks. However, as the two currencies become more dissimilar, their returns could become less correlated.
Investors should also pay attention to the specific use cases of each currency. If an investor is primarily interested in decentralized finance, for example, they may want to consider investing more heavily in Ethereum, which has a stronger presence in the DeFi ecosystem.

Conclusion

The declining correlation between Bitcoin and Ethereum returns is a trend that is likely to continue. As cryptocurrencies continue to evolve, it is becoming increasingly clear that different currencies have different use cases and risk profiles. Investors should pay attention to these differences and invest accordingly.

FAQs

1. Why is the correlation between Bitcoin and Ethereum returns declining?
The declining correlation between Bitcoin and Ethereum returns can be attributed to a number of factors, including their different use cases and mining processes.
2. Should investors still hold both Bitcoin and Ethereum in their portfolios?
Investors should pay attention to the specific use cases of each currency and invest accordingly. Holding both Bitcoin and Ethereum may be less important as their returns become less correlated.
3. What are the specific use cases of Bitcoin and Ethereum?
Bitcoin is primarily used as a store of value, while Ethereum is used for a variety of applications, including decentralized finance (DeFi) and non-fungible tokens (NFTs).