Decoupling early?Bitcoin and Ethereum may eventually break their 36-month correlation

Anish Saxena, a car dealer based in New Delhi, made an “incredible” profit by investing in cryptocurrency in 2020, just when his business was hit by the lockdown caused by the coronavirus pandemic.

The 33-year-old businessman said: “For many years, I have known about Bitcoin and Ethereum and dozens of other assets.” “But I started investing in them after the lockdown forced me and my family to lose their jobs. It helped us Survived-in an extraordinary period.”

Saxena revealed that he has allocated approximately 80% of his investment portfolio to Bitcoin (Bitcoin) And ether (Ethereum), his remaining funds are distributed in Polygon, Dogecoin (dog) And Chainlink link. His cryptocurrency investment has brought him huge profits, and Saxena declined to disclose the specific figures.

However, he did notice that his unrealized profits were almost wiped out due to his decision not to liquidate in advance. The crash of May 2021.

“I’m liquidating cryptocurrency based on my family’s needs for cash,” Saxena said. “Although I am still profitable, seeing my profits drop by more than 50%, which prompted me to convert a large part of my investment back to cash.”

Related risks

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

Although there are differences in economics and use cases, both digital assets tend to move in the same direction. In recent history, their losses and profits seem to be synchronized, indicating that their holders may see their investments grow rapidly during a bull trend, but at the same time, when the uptrend ends and reverses to bearish, They may lose a lot.

Simon Peters, a crypto analyst at the multi-asset brokerage firm eToro, said: “If it is a purely crypto portfolio, then of course, having two cryptos that are highly correlated with each other will increase the risk of the portfolio.”

“Although the portfolio may see outstanding performance in a month, with both cryptocurrencies rising at the same time, as the cryptocurrencies go down together, you may also see a sharp decline in bad months.”

In the past three years, the actual correlation between Bitcoin and Ethereum has rarely fallen below 50%.Source: Skew

On the other hand, Liam Bussell, head of corporate communications at Banxa, a fiat-to-crypto gateway provider, said that Bitcoin and Ether provide liquidity support for crypto traders.

The executive stated in a comment on Cointelegraph that traders used their initial earnings in the top two cryptocurrency markets to invest in low- and mid-end digital assets, and cited Dogecoin rally And opposite Irreplaceable token project. He pointed out:

“Once the market starts to slow down, traders will try to switch to liquid assets such as BTC and ETH. This can offset the decline in a short period of time, but it cannot maintain the market indefinitely. The bear market has benefits, but it is a volatile currency. , The risk is high.”

Historical trends of Bitcoin and Ethereum. Source: TradingView

In addition, Peters recommends that traders and investors balance their crypto investment risks by allocating most of their capital to traditional financial instruments (including stocks, commodities, and fixed income securities/funds).

The analyst explained: “Historically, cryptocurrencies are very uncorrelated with other asset classes and provide better risk-adjusted returns.”

Decoupling early?

At the same time, Peters reminded that the transition of the Ethereum network from Proof of Work to Proof of Stake—that is, Ethereum 2.0—may limit its relevance to Bitcoin.

Specifically, one of the main features included in the upcoming Ethereum blockchain upgrade, called Ethereum Improvement Proposal 1559, is deflation and intends to burn part of the transaction fees charged from users.

This may erase at least 1 million ETH tokens from the circulating supply every year, making assets even more scarce. according to Encrypted educational publication Coinmonks.

Bitcoin exhibits similar scarcity, halving its newly issued supply rate every four years, a process known as halving. The supply of this cryptocurrency is capped at 21 million tokens.

related: Due to the delay of the difficulty bomb, London forks into the Ethereum testnet

“After the transition to 2.0 is complete, there may be a decoupling between Bitcoin and Ether, because’token economics’-the way ETH operates on the 2.0 blockchain-will be different from what it currently is,” Peters said And added:

“The demand for ETH may vary according to the pledge reward rate of return at the time, which in turn may push up or down the price of ETH independently of other cryptocurrencies.”

As for Saxena, the novice trader stated that he will “hold” a portion of BTC and ETH.

“If the economy recovers after the full reopening, I plan to continue investing in Bitcoin, Ethereum, gold and mutual funds,” he pointed out.

The views and opinions expressed here only represent the views of the author and do not necessarily reflect the views of Every investment and trading action involves risk, and you should conduct your own research when making a decision.