BTC had been outperforming ETH, but the spread between the two largest cryptocurrencies has now evaporated as the ether supply continues to decline.
Ether has matched bitcoin in year-to-date performance because ETH’s’ supply continues to decline.
The two largest cryptocurrencies by market value have each gained about 38% this year, spearheading a wider cryptocurrency market upsweep. A week ago, BTC was outpacing ETH by about 6 percentage points. The shift reflects a 1.4% rise in ETH’s price and concurrent 3.1% drop in BTC.
The change also comes as the ether supply has tumbled by 17,800 year to date. Many investors view ETH as a deflationary asset that will weather upward price pressure better than other digital assets and traditional currencies.
The correlation between the two assets has continued to decline as well. While the correlation coefficient between BTC and ETH is usually above .90, it now sits at .41.
Correlation coefficients range between 1 and -1, with the former implying a strong pricing relationship, and the latter indicating an inverse one.
The falling correlation may stem from the following intertwining factors.
Investors may have seen BTC’s outperformance and ETH’s underperformance as overdone.
As they saw this disconnect, some investors likely identified the opportunity to go long ETH, while BTC investors either stood pat or sold off.
The confluence of those two factors caused the deterioration of the BTC and ETH correlation to accelerate.
Investors should now watch whether the decreased correlation declines further or reverts to historic norms, although with the spread recently evaporating, the latter is likelier to occur.
And investors may also want to watch the net position change for ETH. An increased amount of ether leaving centralized exchanges would signal that holders of the asset are less inclined to sell at the moment. As of Feb. 2, investors were sending more ETH to exchanges than removing it, but that has since changed.