Decoupling of Bitcoin and Ether: Implications for Investors and the Crypto Market

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The world’s top two cryptocurrencies, Bitcoin (BTC) and Ether (ETH), enjoyed a positive relationship for most of 2022, with both price movements complementing each other. However, this year has seen a notable weakening of that correlation. As of Monday, the 30-day rolling correlation between the two tokens dipped to 77%, the lowest point since 2021, and significantly down from the 96% observed just two months ago, as shown by crypto data provider Kaiko.

Ether has been known to decouple from Bitcoin for short periods in the past. Yet, the present decline in correlation suggests that a more long-lasting change might be in the cards. If this continues, Bitcoin may no longer anchor Ether’s price and the broader market, implying a “regime change,” says Pulkit Goyal, Vice President of trading at OrBit Markets, an institutional liquidity provider of options and structured derivatives in digital assets.

This change has been attributed to many factors, including Ethereum’s shift from a Proof of Work (PoW) to a Proof of Stake (PoS) consensus mechanism. With this shift, the economic foundations of supply and demand for both tokens have started to diverge. Goyal argues that while Bitcoin will maintain its status as “digital gold” or a blue-chip stock, Ether will emerge as a growth stock or an emerging market.

One of the main events contributing to this change was Ethereum’s transition to the energy-efficient PoS mechanism in September 2022. Additionally, Ethereum recently implemented the Shapella upgrade, which has contributed to de-risking the passive investing strategy, allowing users to stake coins for rewards on the smart contract platform. Moreover, the amount of ETH burnt is closely tied to network usage. In contrast, Bitcoin remains a macro asset, influenced by inflation and liquidity changes in traditional finance.

This decoupling trend between Bitcoin and Ether, as pointed out by Kaiko’s latest weekly newsletter, may lead to increased trading activity in Bitcoin-Ether pairs listed on large exchanges, such as Binance. Goyal believes that this phenomenon could offer new opportunities for traders to leverage the value difference between the two tokens without involving the dollar. Over-the-counter (OTC) demand for options in the BTC/ETH cross has already picked up, reflecting these emerging opportunities.

While the long-term consequences of this market shift remain to be seen, both avid traders and casual observers alike should keep a close eye on the evolving relationship between these two cryptocurrencies. As the correlation continues to weaken, strategies and market dynamics will likely change along with it.

Source: Coindesk

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