Since 2018, Bitcoin and Ethereum have largely traded in lockstep, putting crypto-only investment portfolios at risk.
Overreliance on the two most prominent cryptocurrencies, Bitcoin and Ether, has put retail traders under pressure.
Despite their economic and use-case disparities, both digital assets are trending in the same direction. In recent history, their losses and profits have appeared to be well-synchronized, implying that their holders may see their investments increase rapidly during bull trends, but risk losing a lot when the upswing exhausts and the bearish side takes over.
“Of course, having two cryptos that are closely associated with one another increases risk in a pure crypto portfolio,” said Simon Peters, a crypto analyst at eToro, a multi-asset brokerage firm.
The realized connection between Bitcoin and Ether has rarely dipped below 50% in the preceding three years. Bitcoin and Ether, 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.
Is it time to decouple?
The Ethereum network’s change from proof-of-work to proof-of-stake, known as Ethereum 2.0, according to Peters, may limit its association with Bitcoin.
Deflation, which aims to burn a portion of user transaction fees, is one of the key aspects of the impending Ethereum blockchain upgrade, known as Ethereum Improvement Proposal 1559.
According to Coinmonks, a crypto education publication, this might take at least one million ETH tokens out of circulation each year, making the currency more scarce.
Bitcoin’s newly issued supply rate is halved every four years, creating a comparable scarcity. The total number of tokens available in the cryptocurrency is limited to 21 million.
Because the ‘tokenomics’ — how ETH functions on the 2.0 blockchain — will be different than it is now, Peters added, “it’s feasible that a decoupling between bitcoin and ether may occur following the conclusion of the 2.0 transition.”
“Demand for ETH may fluctuate depending on current staking incentive yields, driving the price of ETH higher or lower independently of other cryptos.”