Bitcoin’s outperformance relative to ether highlights a flight to safety. The assets’ normally tight correlation has decoupled periodically in recent weeks.
In the aftermath of the U.S. Federal Reserve’s interest rate increase, what stands out more than the immediate reaction in bitcoin (BTC) and ether (ETH) pricing is their performance relative to each other in recent weeks.
The two largest cryptocurrencies by market capitalization, which have been tightly correlated throughout much of their histories, have differed in performance this year. That difference has accelerated since the middle of this month. The ETH/BTC pair has declined 17% since mid-January and 11% since March 12.
BTC and ETH have had different levels of success in 2023, with BTC increasing in price by 65% and ETH rising an impressive but less robust 45% for the year to date. The disparity between the two highlights the resilience of one and the potential opportunity in the other.
Wednesday’s Federal Open Markets Committee (FOMC) decision to raise interest rates by 25 basis points resulted in both BTC and ETH selling off, but under different circumstances.
BTC’s daily trading volume on Wednesday was nearly identical to its 20-day moving average, falling 3%. ETH’s 4% decline, however, was fueled by trading volume that exceeded its 20-day average by 24%
The answer appears to link to recent turmoil involving Silvergate, Silicon Valley Bank (SVB) and the banking industry in general. Two events appear to have occurred:
- Bitcoin enjoyed a flight to safety as concerns about the banking industry ramped up. As a result, the “bitcoin as an alternative to fiat currency debasement” argument resurfaced.
- The subsequent guarantee of deposits at SVB alleviated some concerns about digital assets, given the institution’s ties to the crypto sector.
So on one hand, BTC catches a bid higher because investors see value in an asset that resides outside traditional banking landscape. It then catches an additional bid as concerns about crypto firms’ deposits at beleaguered banks subside.
The combination of factors has driven bitcoin higher. BTC’s correlation with the dollar index (DXY) has moved to -0.78, indicating a growing inverse relationship between BTC and the U.S. dollar.
Asset correlations range between 1 and -1, with numbers close to 1 indicating a direct pricing relationship, and numbers closer to -1 indicating an inverse relationship.
BTC’s correlation with ETH remains strong at 0.97 but declined to 0.39 on Wednesday as the FOMC made its rate announcement.
Little changed specific to the assets themselves, just the degree to which they respond to Fed monetary policy. Following the intraday decline in correlation, BTC and ETH rapidly regained their ties.
This trend could well catch the eye of bullish ETH traders who view the disparity in performance as overdone and unjustified.