Is a separation threatening? Bitcoin and Ethereum could finally break their 36-month correlation

Anish Saxena, a car dealer based in New Delhi, made “incredible” profits by investing in cryptocurrencies in 2020, as well as its business was hit by the lockdown triggered by the coronavirus pandemic.

“I’ve known Bitcoin and Ethereum and dozens of other assets for years”said the 33-year-old businessman.“But I wasn’t able to invest in them until after the closure left me and my family unemployed. And it helped us survive in a big way.”.

Saxena announced that it had allocated around 80% of its investment portfolio to Bitcoin (BTC) and Ether (ETH), while the rest of its capital was split into Polygon, Dogecoin (DOGE) and Chainlink’s LINK. His investment in cryptocurrencies alone brought him enormous returns, the numbers of which Saxena did not want to disclose.

Is a separation threatening?  Bitcoin and Ethereum could finally break their 36-month correlation
Is a separation threatening? Bitcoin and Ethereum could finally break their 36-month correlation

However, he found that half of his unrealized income was nearly wiped out by choosing not to liquidate until the May 2021 crash.

“I liquidated cryptocurrencies based on my household’s cash demand.”said Saxena. “I still have profits, but their decline by more than 50% has meant that I have recovered a large part of my investments in cash.”.

Correlation Risks

Retailers like Saxena have come under pressure due to over-reliance on the two most widely used cryptocurrencies: Bitcoin and Ether.

Although they differ in terms of economy and use cases, both digital assets tend to move in the same direction. In recent history, their profits and losses appeared to be well synchronized, showing that their owners can see their investments grow rapidly in uptrends, but at the same time cTake the risk of losing a lot when the uptrend exhausts and you turn to the bearish side.

“If it is a pure cryptocurrency portfolio, then of course two cryptocurrencies that are strongly correlated with one another increase the risk for the portfolio.”said Simon Peters, cryptocurrency analyst at multi-asset brokerage firm eToro.

“While the portfolio could do an exceptional month in a month if the two cryptocurrencies were profitable together, it could also see large declines in a bad month if the cryptocurrencies collapsed.”

The realized correlation between Bitcoin and Ether has rarely fallen below 50% in the past three years. Source: Skew

On the other hand, Liam Bussell, Head of Corporate Communications at Fiat-to-Crypto-Ramp provider Banxa, rates Bitcoin and Ether as liquidity safeguards for crypto traders.

In his comments on Cointelegraph, The executive said traders use their initial earnings in the top two cryptocurrency markets to invest in small and mid-cap digital assets, citing rallies on Dogecoin and non-fungible token projects.

â ???? Once the market slows down, traders try to return to cash like BTC and ETH. This can offset declines for a short time, but it cannot hold the market indefinitely. Profits can be made in bear markets, but these are volatile currencies and the risk is high. “

The trends of Bitcoin and Ether throughout its history. Source: TradingView

In addition, Peters advised dealers and investors counteract your crypto investment risks by investing a good part of your capital in traditional financial instruments, including stocks, commodities, and fixed income securities / funds.

â ???? Historically, it has been shown that cryptocurrencies have no correlation with other asset classes and offer better risk-adjusted returnsâ ????explained the analyst.

Separation threatens?

Peters, meanwhile, recalled that the transition from the Ethereum network from Proof-of-Work to Proof-of-Stake, known as Ethereum 2.0, could limit its correlation with Bitcoin.

In detail, one of the main features of the upcoming Ethereum blockchain update called Ethereum Improvement Proposal 1559 is included. is deflation and is designed to burn off some of the transaction fees charged to users.

That could remove at least 1 million ETH tokens from circulation every yearwhich makes the asset scarcer, according to crypto education publication Coinmonks

Bitcoin is experiencing a similar scarcity by halving its newly issued supply rate every four years, a process called halving. The cryptocurrency has a limited delivery limit of 21 million tokens.

“It is possible that after the transition to 2.0 is complete, there will be a separation between Bitcoin and Ether, as the ‘tokenomy’, as ETH is working on Blockchain 2.0, differs from the current one.”Peters said, adding:

“Demand for ETH could vary based on the staking rewards performance at that point in time, which in turn could drive the price of ETH higher or lower independent of other cryptos.”

As for Saxena, the inexperienced trader said he would hold part of his BTC and ETH.

“When business recovers after the economy fully reopens, I plan to invest consistently in Bitcoin, Ethereum, gold and mutual funds.”he emphasized.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Any move in investment and trading involves risk, you must conduct your own research to make a decision.

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