The Decline in Correlation Between Bitcoin and Ethereum Returns
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 Ethere
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
Bitcoin and Ethereum are among the most popular cryptocurrencies available in the market today. With the increasing adoption of digital currencies, many investors have been showing interest in trading and investing in both of these cryptocurrencies. According to reports, Coinbase stated in a research report that the correlation between Bitcoin and Ethereum returns has been declining since mid March.
Understanding Correlation Between Bitcoin and Ethereum Returns
Before we delve into the reasons behind the decline in the correlation between Bitcoin and Ethereum returns, let us first understand the concept of correlation. Correlation refers to the degree to which two or more variables move in tandem with each other. In the case of Bitcoin and Ethereum, correlation is used to analyze the relationship between their returns. If the correlation is high, it would mean that the returns of Bitcoin and Ethereum move in the same direction, whereas a low correlation would mean the opposite.
Declining Correlation Since Mid-March
According to Coinbase’s research report, the correlation between Bitcoin and Ethereum returns has been declining since mid-March. The correlation between the two cryptocurrencies was particularly strong before March, indicating a high correlation between their returns. However, as time passed, the correlation gradually started to decline.
Ethereum Upgrades and the Correlation Decline
The decline in the correlation between Bitcoin and Ethereum returns became more apparent after the upgrade of Ethereum in Shanghai. After this upgrade, 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.
Potential Reasons for the Decline in Correlation
There may be several reasons behind the decline in the correlation between Bitcoin and Ethereum returns. One of the main reasons is the growing market capitalization of Ethereum. As the market capitalization of Ethereum has increased, it has become more resistant to market fluctuations, making its price movements more independent of Bitcoin.
Another potential reason may be the increasing adoption and popularity of decentralized finance (DeFi) platforms built on the Ethereum network. These platforms typically involve the use of smart contracts, which enable the creation of various financial applications including lending, borrowing, and trading. As the adoption of DeFi platforms grows, the demand for Ethereum may increase, driving its price up even if Bitcoin falls.
Conclusion
In conclusion, the correlation between Bitcoin and Ethereum returns has been declining since mid-March, and this trend has become more apparent after the upgrade of Ethereum in Shanghai. The weakening of the correlation may continue for another few weeks. The growing market capitalization of Ethereum and the growing adoption of DeFi platforms built on the Ethereum network may be contributing factors to the decline in correlation between the two cryptocurrencies.
FAQs
1. What is correlation in cryptocurrency trading?
Correlation refers to the degree to which two or more variables move in tandem with each other. In cryptocurrency trading, correlation is used to analyze the relationship between the returns of two cryptocurrencies, namely Bitcoin and Ethereum.
2. Why has the correlation between Bitcoin and Ethereum returns been declining?
The correlation between Bitcoin and Ethereum returns has been declining due to several reasons, including the growing market capitalization of Ethereum and the increasing popularity of DeFi platforms built on the Ethereum network.
3. How long will the decline in correlation continue?
According to the Coinbase research report, 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.
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