Bitcoin and Ethereum are the most prominent cryptocurrencies on the market and got more popular as the crypto universe expanded. Although Bitcoin is the first digital coin ever created, it maintained a steady development and won the trust of its customers. On the other hand,
Ethereum was made a little bit later but impressed investors with unique features like smart contracts and digitalization tools. Of course, this aspect affected its price, although it hasn’t reached the same value as Bitcoin. Still, there’s no best way to buy Ethereum, as the coin has expanded enough to be handled through credit card, bank deposit or P2P trading.
Despite their individual development, Bitcoin and Ethereum’s prices are more correlated than investors think. It may be that the competition has beneficial results for both coins, but it seems like ETH closely follows BTC in regard to price correlation.
What is the correlation concept in the crypto market?
Correlation between two assets isn’t something new to investors. In stock market trading, for example, which is similar to crypto in many ways, this occurrence shows how the value of stocks or bonds is moving in a similar direction, despite having different features. It’s interesting, however, how in crypto, this correlation can happen to multiple assets, something that occurred during the 2018 Bitcoin price crash.
The link between Bitcoin and Ethereum comes from a correlation coefficient that is calculated through a negative and positive spectrum. While we’re not going to dive into mathematical matters and explain the phenomenon, it’s good to keep in mind that this is a complex thing about the relationship between these two asserts.
In a positive correlation, BTC and ETH experience price increases that happen at the same time, which makes the tide stronger. There’s also the possibility of a negative dynamic, which means one goes up and the other goes down.
BTC-ETH correlation has been one of the weakest recently
Lately, however, experts have seen that the positive relationship from 2022 has weakened now, leaving Ethereum behind Bitcoin. That might’ve happened due to the change of Ethereum from PoW to PoS, which focused more on the blockchain rather than the store of value as a cryptocurrency. On the other hand, Bitcoin, which is considered the digital gold of today, is waiting for the following year’s halving, which is supposed to lead to increased prices, which is maybe why investors are fired up on the first cryptocurrency.
While it’s true that Bitcoin and Ethereum can work together as different but similar assets, they will always experience negative correlations due to development changes. For example, Ethereum is always performing updates to the blockchain as a way to deal with volatility and gas fee challenges, which might take it back at times.
On the other hand, Bitcoin hasn’t changed that much since its deployment, but it’s also less complex to handle compared to Ethereum. Despite its massive volatility issues, first-time investors will always choose it over other assets, despite their benefits.
How much will Bitcoin be correlated to Ethereum?
Bitcoin and Ethereum will have very different paths in the future. Bitcoin’s coin limit will end at some point, from which miners will only get incentivized by transaction fees. Ethereum, on the other hand, has no coin limit, but we don’t know what’s the final outlook on it in the long run. It may be developed to be used more as a tool for creating other assets, such as Dapps and NFTs.
It is expected that Bitcoin will reach a supposed end around 2140, according to calculations of the future halvings and the current situation of the coin. However, no one knows what will happen to the crypto market until then. The discussions of adopting Bitcoin worldwide are continuing, despite issues with the economic struggles of developing countries.
Ethereum is second to worldwide adoption as a cryptocurrency but is currently used by numerous decentralized companies for transactions and other services. Even if Ethereum as a digital coin loses its value, the blockchain and its projects will still be valuable because investors are increasingly interested in NFTs and in-game assets. At the same time, the merger between blockchain and AI is developing well, so Ethereum might have a long way to go.
What are the disadvantages of Bitcoin and Ethereum?
Bitcoin and Ethereum might complete each other, but their issues might hinder the correlation to continue forever. For instance, Bitcoin has significant problems with mining power because even one Bitcoin requires extreme computational power to be mined, raising environmental concerns.
The cryptocurrency must be leveraged in a sustainable way that doesn’t harm nature or increase energy prices within an area.
Ethereum, on the other hand, is known for its scalability challenges. The network was heavily flooded with users in a short time, which overwhelmed the number of nodes around the world. This led to network congestion and high transaction fees, but after the Merge update and the switch from PoW to PoS, Ethereum became more sustainable and efficient.
Low correlation between Bitcoin and Ethereum affects investments
After the Shapella hard fork update, Ethereum and Bitcoin went on different paths. Bitcoin has continued its correlation with the Nasdaq, and Ethereum developed by allowing customers to withdraw their funds.
The declining relationship between cryptocurrencies means investors need to change their hedging strategies. However, it’s still better to hold both assets instead of the one with increased efficiency because it will still reduce the overall volatility. Still, Bitcoin’s correlation with Nasdaq shows the downfall of its market sentiment, which might’ve put stocks up and led to higher earnings growth potential. Overall, the link between the two cryptocurrencies hasn’t been that good since 2020, but each asset has its own road to success.
Bitcoin, the first cryptocurrency ever created, is linked with Ethereum in regard to price. Sometimes, their values go in the same direction, which gives investors plenty of advantages for their portfolios. Still, when Bitcoin goes down, Ethereum might experience an increase, and vice versa, which is a normal relationship between the two most powerful digital assets.