CoinDesk Analysis Team
CoinDesk
The correlation between bitcoin (BTC) and ether (ETH) returns has been declining since mid-March, when BTC started outperforming against the backdrop of the U.S. banking turmoil and increased regulatory scrutiny of non-bitcoin digital assets, Coinbase (COIN) said in a research report Friday.
The decline in the relationship has become more pronounced following the Ethereum blockchain’s Shanghai upgrade – aka Shapella, the report said, noting that a similar trend was seen in September 2022 following the network’s previous update, the Merge.
The Shanghai upgrade was successfully completed on April 12 and enables validators to withdraw staked ether.
“The relevance of this falling correlation for institutional investors is that it can affect quantitative strategies that rely on cross hedging one asset for the other (or using ETH as a hedge for less liquid altcoins),” analysts David Duong and Brian Cubellis wrote.
From a fundamental perspective “it supports diversification arguments in favor of holding both BTC and ETH,” they wrote.
The weakening in the 40-day correlation of daily returns may continue for another two weeks because the initial phase of ether withdrawals following the upgrade is still in effect, the note said.
Coinbase estimates that as of April 20 an additional 73,000 ether could be unlocked in partial withdrawals and 822,000 unlocked in full withdrawals, and this could take about 15 days to process.
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