The popularity of Bitcoin over the course of its existence is well earned. It was created as a technology that will disrupt the finance industry as we know it – a technology that will give the populace the financial freedom that they deserved. Ethereum came to cement and expand on the core value of Bitcoin. They have both been successful in their quest to enhance financial freedom leading to the demand to buy Bitcoin and Ethereum. Their prices are value-driven, hence, the more value they deliver and acceptance they get, the higher their demand and prices. Apart from being disruptive in their own ways, there has always been a price correlation between the two assets.
Price correlation definition
Price correlation is a statistical tool that measures the rate at which two currencies move with each other. Simply put, price correlation means the effect of the price movement of one currency on another currency. In this case, price correlation of Bitcoin and Ethereum the effect of Bitcoin price on Ethereum and vice versa.
While it is a general belief that ETH follows Bitcoin, research proves that Ethereum is independent of Bitcoin.
A research carried out by Skew in 2019 revealed that Ethereum was the most correlated crypto asset to Bitcoin for two years. Conversely, another research by Binance revealed that ETH was the most correlated asset in 2019.
Correlation in the cryptocurrency market is different from that of stock because correlation may apply to all crypto assets at once. We experienced this in 2018 when the Bitcoin price crashed and other crypto assets followed suit.
Should you rely on the correlation when you want to buy Bitcoin in India? Is ETH as correlated to Bitcoin as believed?
Here is our opinion on Bitcoin and Ethereum price correlation.
1. Bitcoin rules the crypto market
The 2017 bull run and 2018 bear run proved that the pioneering cryptocurrency is the forerunner and key influencer of the crypto market. It defines and stirs the market trend. Chart analysis reveals that a drop in the price of BTC will lead to a fall in the price of ETH, XRP, LTC and other digital assets.
Therefore, the effect of BTC has on the price of other crypto assets, especially ETH is a natural occurrence in the cryptocurrency market.
Just like the stock exchange where every asset correlates with USD, every cryptocurrency asset moves in Bitcoin’s direction. Major and minor altcoins are fixed against the movement of Bitcoin.
A volatility index report shows that BTC/ETH correlation is higher than Bitcoin and other crypto assets. Bitcoin rules the cryptocurrency world and every other coin will follow its trend.
It is clear that the Bitcoin price is the point of reference for other assets in the crypto market. In the event of spiked volatility and regulation issues from the SEC, ETH price will sway in the same direction as BTC. This is how to buy Bitcoin in India than other cryptocurrencies.
Yes, the cryptocurrency market is led by Bitcoin but the explosive move of Ethereum is a factor to consider. While Bitcoin has a steady and consistent price increase, the price of Ethereum surges explosively.
Think about it this way, when Bitcoin’s price goes up, ETH generally goes up, when Bitcoin drops, Ethereum drops. But when Bitcoin travels sideways for a long period of time (a couple of days), Ethereum will pump through the roof.
2. ETH is a lone ranger
Conversely, if a BTC specific event occurs – like the SEC rejecting Bitcoin trading in some states in the United States – the price correlation between the two assets may become inverse and ETH’s price may go up while the price of Bitcoin falls.
The massive growth of the DeFi market in 2020 paved another path for ETH to be a king on its lane. ETH became the beacon for other massive cryptocurrency projects thanks to the power of smart contracts.
There are over 356, 545 tokens developed on the Ethereum platform and about 200 of them are listed on Coinmarketcap. Successful tokens like DAI, Uniswap and Maker have varying price movements which impact the price of Ethereum. To own any of the thousands of tokens available, the easiest way is to buy Ethereum and swap it for the token on a DEX or DeFi exchange. When there’s a high demand for any of these tokens, the demand and price also increase.
Thus, Ethereum smart contracts and the Defi ecosystem drive Ethereum price movement to a significant degree. ETH correlation with tokens on the Ethereum network is more obvious than the BTC/ETH price correlation.
The basic law for investment is that you must diversify your portfolio. You can achieve this by buy asses that are less-correlated, which means that their price movement must be nearly opposite. If asset A is falling, then asset B but be on the rise. Therefore, the investor can take profit from asset A while and waits for asset B to recover.
However, the crypto market is a different investment ball game. The price of most crypto assets usually changes concurrently, according to research by Binance in 2020. The research revealed that the mean correlation between major altcoins in 2019 was 0.7.
What this means is that in 70% of price movements, crypto-assets like ETH, LTC, Ripple and BCH fall and rise concurrently.
Hence, using these major altcoins to diversify your portfolio may not be the wisest decision. There is an evident correlation between Bitcoin and ETH on the basis that BTC is the king of the cryptomarket. Regardless, investors like the Winklevoss brothers buy BTC and also invest in ETH because it is yet to scrape the surface of its all-time high and they believe it is the future of decentralized finance.
The best investment advice would be to buy Bitcoin and Ethereum, then accumulate as many DeFi tokens as possible. DeFi tokens are quite cheap to invest in and their massive ROI in a short time frame makes them good investments. Concludingly, the crypto market is very volatile, so only invest what you can afford to lose.