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- The correlation between Bitcoin
and Ethereum has dropped to its lowest level since November 2021.
- The BTC-ETH correlation fell below 80% during the week.
Why is the correlation between the two largest cryptocurrencies, Bitcoin and Ethereum, decreasing?
Bitcoin and Ethereum Correlation is Decreasing!
The correlation between Bitcoin and Ethereum has dropped to its lowest level since November 2021, indicating a significant difference in the growth trajectories of the two blue-chip cryptocurrencies in the market.
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Bitcoin’s Correlation with Ethereum
According to market data provider Kaiko, based on a 40-day moving window, the correlation fell below 80% during the week. This was a significant deviation from the all-time high (ATH) of 97% seen at the end of 2022.
Is Shapella the Reason?
As shown, the correlation between the two cryptocurrencies has been decreasing from mid-March to the end. However, after the much-anticipated Shapella Upgrade was released in April, the gap widened and brought some improvements specific to Ethereum.
Interestingly, a similar event called the Merge, which started Ethereum’s transition to a proof-of-stake (PoS) blockchain in September 2022, did not cause a significant divergence between the two assets.
However, the recent Shapella Upgrade closed the loop on some significant aspects of the transition that did not reach Merge last year, positioning Ethereum as a full-fledged PoS network.
It is important to understand that both assets serve very different functions.
Ethereum is generally used as a platform for developing decentralized applications (dApps) and smart contracts, while Bitcoin is primarily used as a store of value and a payment tool.
In fact, due to being a chain that hosts numerous applications, the total value locked (TVL) in Ethereum was $27 billion at the time of writing. In contrast, Bitcoin had assets worth only $183 million.
What Could the Effects Be?
According to a report by Coinbase on April 21, the lower BTC-ETH correlation creates a situation for portfolio diversification, as both assets can result in higher returns when held. As for institutional investors, the trend can affect buy-sell strategies such as cross-risk hedging.
However, the recent price movements of the two cryptocurrencies showed that both moved almost in the same wave. Earlier this week, BTC’s crash fueled by a false rumor created fluctuations in the wider crypto market, but ETH did not suffer.
Ethereum Price vs Bitcoin Price