The Underlying Correlation Between Bitcoin and Ethereum
The correlation coefficient is the statistical measure of strength that two relative variables have in their relationship. Analysts observed a sync performance between Ethereum and Bitcoin since last year. Both coins have a strong positive relationship. Where their price correlation coefficient is 0.68.
This estimate represents the past 100 days of price action for both assets. The correlation measurement usually has 1 as the strongest positive correlation. -1 represents the strongest negative correlation.
A negative coefficient reveals two prices moving in opposite trends. The positive coefficient, however, shows price actions moving in the same direction.
In this regard, the price of Ethereum has most times depending on the valuation of Bitcoin. Here is why?
Oftentimes factors such as expert forecasts, calamities and major political events have influenced cryptocurrency market sentiment.
Closely, it turns out that overall cryptocurrency market sentiment has a huge influence on Bitcoin. Therefore it is likely that the price of a couple altcoins could depend on the price action of Bitcoin.
According to Skew, Ethereum posted the highest correlation coefficient with Bitcoin for two consecutive years. The total average correlation is 0.9. While 2019 posted the highest correlation index between both digital assets.
2018 bear market will go down the books of history given the historic bitcoin price crash. A squashing crypto market bloodbath followed the massive price shed. This indicated a striking correlation between the price of Bitcoin and that of all crypto assets.
The stock market has witnessed a high correlation between the United States Dollar and equity markets. As the US dollar is the largest store of wealth, so is Bitcoin the largest store of asset class wealth. It, therefore, makes sense that the overall performance of crypto markets is pegged on Bitcoin.
However, most traders and analysts agree the Ethereum – Bitcoin correlation is a natural situation in the cryptocurrency market. Meanwhile, Michael Van de Poppe compared the correlation coefficient in crypto markets to that of commodities. The Amsterdam Stock Exchange trader and market analysts said gold leads in the commodities asset class. Gold’s price sets the pace for other metals.
It is therefore clear that Bitcoin’s price could change as a result of government policies, high volatility in traditional financial markets; but this change will likely reflect on the entire cryptocurrency market. However, Van de Poppe notes slight variations in this observation. He says:
“Some parts the correlation is high in which Ethereum outperforms Bitcoin, in some parts, it’s low as Ethereum drops hard against Bitcoin, while Bitcoin trends up against USD. It’s different in different parts.”
Ethereum will not necessarily repeat Bitcoin price movements. A correlation study for the period between June 2017 and December 2019 revealed that 5 of 14 cases indicated a strong positive correlation. While four cases showed a negative correlation coefficient.
However, the correlation between Ethereum and Bitcoin has intensified since the last half of 2019. Nonetheless, researchers at the San Francisco Open Exchange reveal Ethereum’s strong correlation is a result of general failure.
Particularly the failure to launch Ethereum 2.0 in 2019. Several studies have also been trying to establish a correlation pattern between cryptocurrency and equity markets. Sadly, none was identified and traders have been quick to suggest that correlation is not a reliable tool for market analysis.