Ethereum will decouple from Bitcoin? The 36-month correlation may be broken

In 2020, the auto dealership business of Anish Saxena, a car dealer in New Delhi, was hit due to the regulation caused by the new crown epidemic. However, he made an “incredible” profit by investing in crypto assets.

“I know Bitcoin, Ethereum, and dozens of other crypto assets have been around for many years,” said the 33-year-old businessman. “But after the epidemic affected me and my family, I invested in crypto assets. It helped We survived the storm.”

Saxena revealed that he allocated 80% of his investment portfolio to Bitcoin and Ethereum, and the remaining funds were distributed on Polygon, Dogecoin and LINK. Investing in crypto assets has brought him huge profits, but Sachsena declined to disclose the specific figures.

However, he noticed that because he did not sell before the crash in May 2021, his unrealized profits were almost wiped out in half.

“I liquidated crypto assets based on the family’s demand for cash,” Sachsena said. “Although I’m still profitable, I saw income drop by more than 50%, which allowed me to exchange a large portion of my investment back into cash. .”

Related risks

Due to excessive reliance on the two most important crypto assets: Bitcoin and Ethereum, retail investors like Saxena are under pressure.

Although Bitcoin and Ethereum have different economic models and application directions, the price trends of the two in the secondary market often show a great positive correlation. Judging from the recent market, their losses and gains seem to be synchronized. This shows that investors who hold these two assets at the same time may make money quickly in a bull market, but when the uptrend is exhausted and turns to a bear market, they will also face greater risks and losses.

Simon Peters, a crypto asset analyst at the multi-asset brokerage firm eToro, said: “For a purely crypto asset portfolio, holding two highly correlated crypto assets will certainly increase the risk of the portfolio.”

“Although when two crypto assets rise at the same time, the portfolio may perform well in the month; but you may also see a sharp decline in a bad month, because the two crypto assets will go down together.”

Ethereum will decouple from Bitcoin? The 36-month correlation may be broken

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

On the other hand, Liam Bussell, director of corporate communications at Banxa, a legal encryption gateway provider, said that Bitcoin and Ethereum can provide liquidity support for crypto traders.

He told reporters at Cointelegraph that traders use their initial earnings in the Bitcoin and Ethereum markets to invest in digital assets with medium and low market value, such as Dogecoin and some NFT projects. He pointed out:

“Once the market starts to slow down, traders will try to turn to liquid assets, such as Bitcoin and Ethereum. This can offset the decline in a short period of time and can also make gains in a bear market. But this approach cannot be indefinitely Maintaining the market is not a stable source of income, and the risk is high.”

Ethereum will decouple from Bitcoin? The 36-month correlation may be broken

The correlation trend of Bitcoin and Ethereum runs through its historySource: TradingView

In addition, Peters suggests that traders and investors can allocate most of their funds to traditional financial instruments, such as stocks, commodities, fixed income securities/funds, etc., to balance the investment risks of encrypted assets.

The analyst explained: ” Historically, the correlation between crypto assets and other asset classes is very low, and can provide higher risk-adjusted returns. “

Can decoupling succeed?

At the same time, Peters reminded that the transformation of the Ethereum network from “PoW” and “PoS” (that is, Ethereum 2.0) may limit its relevance to Bitcoin.

Specifically, the upcoming EIP-1559 proposal may bring Ethereum into an era of deflation and will destroy part of the transaction fees collected from users.

According to Coinmonks, a popular science media in the encryption field, this may cause at least 1 million ETH to disappear from circulation every year, making assets even more scarce.

Bitcoin also exhibits similar scarcity, halving its newly issued supply every four years, a process known as “halving.” The supply of Bitcoin is capped at 21 million.

“After the transition of Ethereum 2.0 is over, Bitcoin and Ethereum may be decoupled, because then the’token economy’ (tokenomics, here refers to the way Ethereum works on the 2.0 blockchain) of Ethereum will be different from the current one. “The demand for Ether may change based on the return on investment at the time, which in turn may drive the price of Ether up or down independently of other crypto assets,” said Peters.

As for Saxena, the novice trader stated that he would “hodl” (hodl, a long-term firm holding of certain encrypted assets regardless of the price of the currency) part of Bitcoin and Ether.

He said: “If the auto business improves again after the economy fully recovers, I plan to continue investing in Bitcoin, Ethereum, gold and funds.”



Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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