• Are we on the verge of decoupling? The 36-month link between Bitcoin and Ethereum may finally be broken

  • In 2020, Anish Saxena, a New Delhi-based vehicle salesman, achieved “amazing” profits by investing in bitcoins, just as his company was hit by the coronavirus pandemic-induced shutdown.

    “I’d known about Bitcoin and Ethereum, as well as dozens of other assets, for years,” the 33-year-old entrepreneur explained. “However, I was only able to invest in them when the lockdown forced my family and me out of work. And that made a huge difference in our ability to survive.”

    Anish said that Bitcoin (BTC) and Ether (ETH) accounted for around 80% of his investment portfolio, with the remainder split between Polygon, Dogecoin (DOGE), and Chainlink (LINK). Anish declined to divulge the amount of money he made from his crypto-only investment.

    He did notice, however, that by electing not to liquidate before the May 2021 fall, he almost lost half of his unrealized earnings.

    “I was liquidating cryptocurrencies based on the requirement for cash in my household,” Anish explained. “While I am still profitable, seeing my profits drop by more than half has prompted me to convert a significant chunk of my investments to cash.”

    Correlation dangers

    Over-reliance on two of the most popular cryptocurrencies, Bitcoin and Ether, has put retail traders like Anish under pressure.

    Both digital assets tend to move in the same direction, notwithstanding their differences in terms of economics and use cases. Their losses and profits appeared to be well-synchronized in recent history, indicating that their owners may see their assets increase rapidly during bull trends but risk losing a lot when the upswing exhausts and turns to the bearish side.

    “Having two cryptos that are closely connected with one another adds risk to the portfolio if it is a pure crypto portfolio,” said Simon Peters, a crypto analyst at multi-asset brokerage eToro.

    “While the portfolio could experience fantastic return one month if the two cryptos grow at the same time, you could also see massive drawdowns in a terrible month if the cryptos both fall.”

    Bitcoin and Ethereum, on the other hand, are referred to as liquidity backstops for crypto traders by Liam Bussell, head of corporate relations at Banxa, a fiat-to-crypto gateway provider.

    Traders use their first gains in the top two cryptocurrency markets to invest in mid and lower-cap digital assets, according to the CEO, highlighting rallies in Dogecoin and across non-fungible token projects. He added:

    “Traders try to return to liquid assets like BTC and ETH as the market begins to slow. This can temporarily counteract dips, but it won’t keep the market stable long. Bear markets offer opportunities for profit, but the coins are highly volatile, and the danger is significant.”

    Peters also recommended traders and investors hedge their crypto investments by investing a significant amount of their money in traditional financial instruments such as equities, commodities, and fixed-income securities/funds.

    “Historically, cryptocurrency has demonstrated to be relatively uncorrelated to other asset classes and to produce better risk-adjusted returns,” the analyst noted.

    Are we on the verge of decoupling?

    Meanwhile, Peters cautioned that the Ethereum network’s shift from proof-of-work to proof-of-stake, dubbed Ethereum 2.0, may limit the network’s association with Bitcoin.

    Deflation is one of the major features included in the future Ethereum blockchain upgrade. The Ethereum improvement proposal, dubbed EIP-1559, aims to burn a portion of transaction fees collected from consumers.

    According to crypto education publication Coinmonks, this might remove at least a million ETH tokens from circulation each year, making the asset scarcer.

    Bitcoin demonstrates a comparable scarcity by halving its freshly issued supply rate every four years. A total of 21 million tokens are available in the coin.

    “A decoupling between bitcoin and ether could occur upon the completion of the 2.0 transition as the ‘tokenomics’ — how ETH functions on the 2.0 blockchain will be different than it is now,” Peters stated, adding that:

    “Demand for ETH could fluctuate depending on current staking incentive yields, driving the price of ETH higher or lower independently of other cryptos.”

    Anish, on the other hand, stated that he would “HODL” a chunk of his BTC and ETH.

    “I’m planning to invest consistently across Bitcoin, Ethereum, gold, and mutual funds once the business takes up again following a full economy reopening,” he said.

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