As Q1 2023 comes to a close, the Bitcoin and Ethereum correlation stands at a staggering 97%, trackers indicate.
The Bitcoin And Ethereum Price Correlation
Bitcoin and Ethereum are the world’s most valuable coins by market cap. Because of their first mover advantage, Bitcoin, the first blockchain network; and Ethereum, a legacy smart contracting platform; their native currencies, BTC and ETH, are also the most liquid and increasingly correlating in price movements.
At the time of writing on March 31, trackers show that the average daily trading volumes of BTC and ETH trading volumes across various exchanges stood at $19.7 billion and $8.4 billion, respectively.
The two coins are also listed in almost all popular centralized cryptocurrency exchanges. Notably, because of the smart contracting capability of Bitcoin, the coin has been tokenized. Billions have been deployed on Ethereum, and other smart contracting platforms. There, BTC holders engage in DeFi and other activities not possible on the Bitcoin mainnet.
That Bitcoin and Ethereum prices have been moving in lockstep over the past few months could be attributed to several factors. However, what stands out is that these coins are the most liquid in the space, with an active base justifying their mega valuations. Their coins can also be quickly shuttled across exchanges without liquidity concerns, attracting macro investors.
Why The Correlation?
Bitcoin has long been viewed as a store of value asset and a medium of exchange. The coin has a limited total supply of 21 million, and over 90% have been mined.
Proponents hold that during a crisis in traditional finance, the coin can be a hedge. This was recently observed following the bank run at Silicon Valley Bank (SVB) and the closure of Signature Bank.
Besides, crypto holders also prefer the coin whenever there are concerns in the industry. Days after the temporary de-pegging of USDC, a stablecoin, Bitcoin prices rose.
Meanwhile, Ethereum is comparatively liquid and is becoming deflationary, a reason why a section of its supporters say ETH, its native currency, would become “ultra sound money,” better than BTC and gold.
“a large portion of the Ethereum ecosystem wants ETH to be ultra sound money”pic.twitter.com/3MI2nDHaXe
— ultra sound money 🦇🔊 (@ultrasoundmoney) July 5, 2021
Aside from liquidity, Ethereum is the largest and most active smart contracting platform. DeFiLlama data shows that over 50% of DeFi’s total value locked (TVL) is in Ethereum-based dapps.
The correlation may continue rising in the months ahead as crypto gains mainstream adoption. Macro investors would most likely gravitate to BTC and ETH, lumping them as risk assets as they diversify their portfolios.
Regulatory clarity, with the United States Security and Exchange Commission (SEC) chairman saying Bitcoin is a commodity while the Commodity Futures Trading Commission (CFTC), in a lawsuit against Binance and its CEO, Changpeng Zhao, also classifying ETH as a commodity, could further boost this correlation.
CFTC says that Bitcoin, Ethereum, and Litecoin are Commodities pic.twitter.com/nSNX2YIYLP
— Conor (@jconorgrogan) March 27, 2023
Still, it is yet to be seen how Bitcoin prices will react ahead and after the Shanghai Upgrade on Ethereum in mid-April.