- The disconnect was most likely due to an increase in spot ETH ETF launches.
- A lower BTC-ETH correlation argued for portfolio diversification.
Bitcoins [BTC] correlation with Ethereum [ETH] fell to multi-year lows, indicating a major difference in the growth trajectories of the two blue-chip cryptocurrencies.
On a 60-day rolling window basis, correlation dropped to 75% in November, according to crypto market data provider Kaiko. This was a marked departure from the all-time highs (ATH) of 97% at the end of 2022.
Source: Kaiko
Ethereum is weakening its relationship with Bitcoin
AMBCrypto has seen a vertical decline in the relationship since November. Although there was no convincing evidence, the disconnect appeared to be caused by an increase in the number of ETH Exchange Traded Funds (ETFs) introductions.
The broader bullish market was led by excitement over the likely approval of a dozen spot Bitcoin ETF applications. This led to the start of the mid-October rally and by the end of the month, BTC had made a 26% gain.
However, ETH slowly managed to match this pace and ended October with a gain of 17%.
Source: Santiment
However, the announcement of spot ETH ETFs by TradFi giants like BlackRock and Fidelity turned things around for ETH in November. The second-largest cryptocurrency bounced above the crucial $2,000 mark for the first time since May 2022.
Simply put, ETH responded more to developments in its own ecosystem rather than a trickle-down effect.
It is important to understand that both assets function very differently from each other.
Ethereum is mainly used as a platform for the development of decentralized applications (dApps) and smart contracts. Meanwhile, Bitcoin is mainly used as a store of value and as a means of payment.
What is the message for investors?
According to an April 21 report from Coin basethe lower BTC-ETH correlation argues for portfolio diversification, as holding both assets can lead to higher returns.
Smart investors spread their investments across different cryptos, limiting their exposure to one category.
Read Bitcoins [BTC] Price prediction 2023-24
As for institutional investors, the trend could have an impact on their trading strategies, such as cross-hedging. For the curious, cross-hedging is a practice of managing risk by investing in two assets that have similar price movements but are not perfectly correlated.
That said, traders and investors should not take these as investment advice but instead do their due diligence.