2 - 4 minute read
The correlation between Bitcoin (BTC) and Ether (ETH) returns has been declining since mid-March, according to a recent research report by Coinbase. The report notes that the decline in the relationship has become more pronounced following Ethereum’s Shanghai upgrade, which was completed on April 12. The upgrade enables validators to withdraw staked Ether, which could affect quantitative strategies that rely on cross-hedging one asset for the other or using ETH as a hedge for less liquid altcoins.
The report also highlights that from a fundamental perspective, holding both BTC and ETH is a good strategy for diversification. The weakening in the 40-day correlation of daily returns may continue for another two weeks because the initial phase of Ether withdrawals following the upgrade is still in effect.
Analysts David Duong and Brian Cubellis wrote that “the relevance of this falling correlation for institutional investors is that it can affect quantitative strategies that rely on cross hedging one asset for the other (or using ETH as a hedge for less liquid altcoins).”
Coinbase estimates that as of April 20, an additional 73,000 Ether could be unlocked in partial withdrawals, and 822,000 unlocked in full withdrawals. This process could take about 15 days to complete.
The report notes that a similar trend was seen in September 2022 following the network’s previous update, The Merge. The Merge update was a major upgrade to Ethereum, intended to improve its scalability and security.
The report highlights that BTC started outperforming since mid-March against the backdrop of the US banking turmoil and increased regulatory scrutiny of non-Bitcoin digital assets. The decline in the correlation between BTC and ETH returns has become more pronounced since the Shanghai upgrade.
The Bottom Line
The weakening correlation between BTC and ETH returns may provide opportunities for traders to diversify their portfolios. Holding both BTC and ETH is a good strategy for diversification from a fundamental perspective. However, traders should also consider the potential risks associated with the withdrawal of staked Ether following the Shanghai upgrade.