Coinbase Research Report Highlights Weaker Correlation between Bitcoin and Ether Returns
According to a recent report by Coinbase, the correlation between the returns of Bitcoin (BTC) and Ether (ETH) has been declining since mid-March. This trend has become more prominent following the successful completion of Ethereum blockchain’s Shanghai upgrade on April 12, which allows validators to withdraw staked Ether.
Coinbase analysts David Duong and Brian Cubellis noted that the weaker correlation between BTC and ETH returns may have an impact on the hedging strategies of institutional investors. This is particularly relevant for quantitative strategies that rely on cross hedging one asset for the other or using ETH as a hedge for less liquid altcoins.
However, the report also highlights that from a fundamental perspective, the weaker correlation supports the argument for diversification in holding both BTC and ETH. This is because the declining correlation could provide a better hedge against market volatility.
The note further adds that the weakening in the 40-day correlation of daily returns may continue for another two weeks due to the initial phase of Ether withdrawals following the upgrade still being in effect. Coinbase estimates that as of April 20, an additional 73,000 Ether could be unlocked in partial withdrawals and 822,000 unlocked in full withdrawals, which could take around 15 days to process.
Overall, the report suggests that the weakening correlation between BTC and ETH returns could impact the hedging approaches of crypto investors, but it also highlights the importance of diversification in holding both assets.