Since mid-March, Coinbase, a prominent cryptocurrency exchange, has noted a decreasing correlation between the returns of Bitcoin (BTC) and Ethereum (ETH), according to a research report. The decline in correlation became more pronounced after the successful Shanghai upgrade of the Ethereum blockchain, which now enables validators to withdraw staked ether. This pattern is similar to the trend observed after the previous network update, the Merge, in September 2022.
This falling correlation has implications for institutional investors who rely on cross-hedging one asset for the other or use ETH as a hedge for less liquid altcoins, said analysts David Duong and Brian Cubellis in the report. They suggested that holding both BTC and ETH would support diversification arguments from a fundamental perspective. The report further stated that the weakening in the 40-day correlation of daily returns may continue for another two weeks as the initial phase of ether withdrawals following the upgrade is still in effect.
Coinbase estimated that an additional 73,000 ether could be unlocked in partial withdrawals and 822,000 unlocked in full withdrawals as of April 20, and this could take approximately 15 days to process. The declining correlation between BTC and ETH returns, if it continues, could impact crypto investors’ hedging strategies, highlighting the importance of diversified portfolios.