Decoupling to come? Bitcoin and Ethereum could finally break their 36-month correlation

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New Delhi-based car dealership Anish Saxena made ‘incredible’ profits investing in cryptocurrencies in 2020, just as his business was hit by the lockdown induced by the coronavirus pandemic.

“I had known Bitcoin and Ethereum and dozens of other assets for years,” said the 33-year-old businessman. “But I was only able to invest in them after the lockdown pushed me and my family members out of work. And that helped us survive a lot.”

Anish revealed that he allocated around 80% of his investment portfolio to Bitcoin (BTC) and Ether (ETH), with the rest of his capital split between Polygon, Dogecoin (DOGE) and Chainlink (LINK). His crypto-only investment brought him big profits, the numbers of which Anish refused to reveal.

However, he noticed that he had almost wiped out half of his unrealized profits by deciding not to liquidate until the May 2021 crash.

“I was liquidating cryptocurrencies based on my household’s demand for money,” Anish said. “While I’m still a profit, seeing my profits drop by more than 50% made me hand over a large portion of my investments in cash.

Correlation risks

Retail traders like Anish have come under pressure due to overdependence on two of the most popular and popular cryptocurrencies: Bitcoin and Ether.

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While different in economics and use cases, the two digital assets tend to move in the same direction. In recent history, their losses and profits seemed to be well synchronized, illustrating that their holders could see their investments grow rapidly during uptrends but, at the same time, risk losing a lot when the uptrend wears off and reverses. on the bearish side.

“If this is a purely crypto wallet, then of course having two cryptos strongly correlated to each other adds risk to the wallet,” said Simon Peters, crypto analyst at eToro, a multi-asset brokerage firm.

“While the portfolio might see exceptional performance one month with the two cryptos making gains in tandem, you could also see huge declines in a bad month as the cryptos fall together.”

The correlation achieved between Bitcoin and Ethereum has rarely fallen below 50% in the past three years. Source: bias

On the other hand, Liam Bussell, head of corporate communications at fiat-to-crypto gateway provider Banxa, called out Bitcoin and Ethereum liquidity backstops for crypto traders.

In his comments to TUSEN, the executive said traders were using their initial earnings in the two major cryptocurrency markets to invest in mid- and small-cap digital assets, citing rallies in Dogecoin and in token projects. non-fungible. He noted:

“Once the market starts to slow down, traders try to switch back to liquid assets like BTC and ETH. This can offset declines for a short period of time but cannot hold the market indefinitely. There are gains to be made in them. bear markets, but there are volatile coins, and the risk is high. “

Bitcoin and Ethereum trends throughout history. Source: TradingView.com

Additionally, Peters advised traders and investors to offset the risks of their crypto investments by allocating a good chunk of their capital to traditional financial instruments including stocks, commodities and fixed income securities / funds.

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“Historically, crypto has been found to have relatively low correlation with other asset classes and offers better risk-adjusted returns,” the analyst explained.

Decoupling to come?

Peters meanwhile recalled that the Ethereum network’s transition from proof of work to proof of stake, known as Ethereum 2.0, could limit its correlation with Bitcoin.

In detail, one of the main features included in the next Ethereum blockchain upgrade is deflation. Dubbed EIP-1559, Ethereum’s improvement proposal aims to burn off some of the transaction fees collected from users.

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This could eliminate at least one million ETH tokens each year from the circulating supply, thereby making the asset more scarce, according to the crypto education post Coinmonks.

Bitcoin exhibits a similar scarcity by halving its newly issued supply rate every four years, a process called halving. The cryptocurrency has a limited supply cap of 21 million tokens.

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“It is possible that a decoupling will occur between bitcoin and ether after the completion of the transition to 2.0 as ‘tokenomic’ – how ETH works on the 2.0 blockchain will be different from today ‘hui,’ said Peters, adding that:

“The demand for ETH could vary depending on the stake reward returns at that time, which in turn could push the price of ETH up or down independently of other cryptos.”

As for Anish, the novice trader said he “HODL” on some of his BTC and ETH.

“If business picks up after a full reopening of the economy, I plan to systematically invest in Bitcoin, Ethereum, gold and mutual funds,” he noted.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of TUSEN.com. Every investment and trading move comes with risk, you should do your own research before making a decision.