The once-strong correlation between Bitcoin and Ether returns has reportedly begun to weaken, creating new opportunities and challenges for investors.
Coinbase Institutional, in their recent research report “Lower BTC vs ETH correlation,” highlights a falling correlation between Bitcoin and Ether returns since mid-to-late March. The report’s authors say that this decline became more pronounced after the Shanghai (Shapella) fork and parallels a similar trend observed during the Merge in September 2022. They go on to say that the correlation coefficient between daily Bitcoin and Ether returns has dropped from 0.95 to 0.82, which is below the 12-month average of 0.90 and the January low of 0.85 (Coinbase Institutional).
They point out that this falling correlation is relevant for institutional investors, as it can affect quantitative strategies that rely on cross-hedging one asset for the other. From a fundamental perspective, they note that it supports diversification arguments for holding both Bitcoin and Ether. The current period of attenuation has apparently lasted for around 30 days, and Coinbase Institutional believes it could continue for another two weeks as the initial phase of Ether withdrawals is ongoing.
As of April 20, an additional 73k Ether could be unlocked in partial withdrawals and 822k Ether in full withdrawals, taking around 15 days to process. The remaining variable is how much of the fully unstaked Ether could return to the deposit queue. So far, the ratio of withdrawn principal and rewards to deposits has been 2:1 since the upgrade.
Regulatory uncertainty surrounding Ether persists, as SEC Chair Gary Gensler failed to provide a direct answer on its nature (security or commodity) during his testimony before the House Financial Services Committee on April 18.
As the Ethereum network recovers from the Shapella fork, traders are reportedly closely monitoring net Ether withdrawals. Early on April 20, full withdrawals began to be processed, lowering the staking rate and likely adding pressure to the Ether price. This week, the Ether staking ratio will be closely watched for any upward movement that may encourage traders to buy.
Coinbase Institutional also mentions that crypto native hedge funds and traditional asset managers turned net sellers last week, with flows in Bitcoin and Ether being net for sale as traders attempted to book profits and manage risk. Furthermore, they say that altcoins are also experiencing selling pressure with concerns about potential regulation and fears of a coming recession keeping traders underweight in the sector.