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Lower BTC vs ETH correlation

How long can the decreasing BTC vs ETH correlation last?

April 21, 2023

Lower BTC vs ETH correlation

At a glance

The correlation between bitcoin and ether returns has been falling since mid-to-late March, which may be relevant for quantitative strategies that rely on cross hedging.

Key takeaways

  • Performances between these two digital assets have otherwise maintained a fairly stable and high correlation through 2022 into 2023 with the previous noticeable exception of the period immediately following the Merge. We think the current period of attenuation could last through this first phase of ETH withdrawals.
  • We take a look at some recent developments in the Bitcoin infrastructure space including Lightspark – which is focused on enhancing the usability of the Lightning Network – and Civ Kit, a proposal for building peer-to-peer decentralized marketplaces.

Written by

  • David Duong, CFA, Head of Institutional Research
  • Brian Cubellis, Research Analyst

Market View

The correlation between bitcoin and ether returns has been falling since mid-to-late March, around the time BTC started outperforming peers in earnest (against the backdrop of the US banking turmoil and the increased regulatory scrutiny of non-bitcoin digital assets). But the decline of that relationship has become more pronounced in the days following the Shanghai (Shapella) fork, reminiscent of a similar trend observed in September 2022 during the Merge (when Ethereum changed its consensus mechanism to proof-of-stake).

Based on a 40-day rolling window (significant to a 85-90% confidence level), the correlation coefficient between daily bitcoin and ether returns dropped from 0.95 thirty days ago to 0.82 as of April 20, below a 12-month average of 0.90 and the January low of 0.85. (In January, the relationship between these assets was affected by the change in market conditions and technical supply constraints.) Note that the performances between these two digital assets have otherwise maintained a fairly stable and high correlation through 2022 into 2023 outside of the idiosyncratic deviations witnessed in September and January (see chart 1).

Chart 1. Correlations between BTC and ETH daily returns across 40d, 60d and 180d rolling windows

Chart 1. Correlations between BTC and ETH daily returns across 40d, 60d and 180d rolling windows

The relevance of this falling correlation for institutional investors is that it can affect quantitative strategies that rely on cross hedging one asset for the other (or using ETH as a hedge for less liquid altcoins). On the other hand, from a fundamental perspective, it supports diversification arguments in favor of holding both BTC and ETH. Following the Merge, a decrease in the observed correlation coefficient between ETH and BTC returns (from 0.95 to 0.75) lasted for around 47-50 days. Comparatively, the current period of attenuation has lasted for around 30 days, and we think it could continue for another two weeks given that the initial phase of ETH withdrawals is still ongoing.

As of April 20, we project that an additional 73k ETH could be unlocked in partial withdrawals and 822k ETH could be unlocked in full withdrawals (based on what is currently in the exit queue according to Nansen). This could take around 15 days to process. Given that full withdrawals will begin to dominate the withdrawals queue imminently, the remaining variable is how much of these fully unstaked ETH could make their way back to the deposit queue. For now, we do not have enough data to make a reliable estimate. So far, the ratio of withdrawn principal and rewards to deposits has been 2:1 since the upgrade was activated.

Meanwhile, we’ve previously commented on how the bifurcation of regulatory views on bitcoin versus non-bitcoin cryptocurrencies may have contributed to the former’s outperformance and thus potentially the wider correlation gap. There has been little additional clarity on this front with regards to ETH’s status in particular, following SEC Chair Gary Gensler’s testimony on crypto in front of the House Financial Services Committee on April 18. Specifically, Gensler failed to provide a direct answer to questions posed by Committee Chair Patrick McHenry as to the nature of ETH (i.e. security or commodity).

Bitcoin Development

There has been some new activity in the bitcoin developer community recently:

  • Lightspark. Lightspark (a Bitcoin-focused infrastructure company) last week introduced a suite of products and services that may help remedy some of the hurdles to adoption for Bitcoin’s Lightning Network. Backed by David Marcus (former PayPal executive and co-creator of Facebook’s Diem project), the project is being launched after nearly a year of incubation. As mentioned in our recent report “Bitcoin’s layers,” an important factor in Lightning payments being reliable is the aggregate liquidity of channels across the network. Lightspark promises to provide enterprise clients with simplified access to Lightning channel liquidity, APIs to easily integrate Lightning payments into their businesses, and tools to enhance the capital efficiency of their operations.
  • Civ Kit. A new whitepaper titled “Civ Kit: A Peer-to-Peer Electronic Market System” was released late last week, proposing a means of providing the infrastructure necessary to enable censorship-resistant, permissionless, peer-to-peer order books for goods and services. The marketplace would run on the rails of decentralized communications protocol Nostr and the Lightning Network. In theory, users would be able to post trade offers which can be accepted by other users through hashed timelock contracts (HTLCs) via the Lightning Network. Moreover, Civ Kit introduces a trustless reputation system which leverages zero-knowledge proofs in order to prevent spam on the network.

Crypto & Traditional Overview

(as of 4pm EDT, April 20)



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Coinbase Exchange & CES Insights

With Shapella successfully behind us, traders are keeping a close eye on the net ETH withdrawals. Initially, this week, deposits were outpacing withdrawal, which traders saw as a positive sign. However, early Thursday (April 20) full withdrawals started to be processed which brought the staking rate sharply lower and likely added pressure to the ETH price. As we head into next week the ETH staking ratio will be closely watched and any upward movement could encourage traders to step in on the buy side.

Crypto native hedge funds and traditional asset managers have turned net sellers this week while flows from traditional hedge funds were more balanced. Flows in BTC and ETH have both been net for sale as traders looked to book profits and manage risk after the recent outsized gains. Altcoins continue to be better for sale. Potential regulation and fears of a coming recession have kept traders underweight the sector.

coinbase exchange volume chart 4.20.23
pie chart of most traded coins on coinbase exchange 4.20.23

Financing Rates



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Notable Crypto News


  • How ZkEVM Could Help Power The Next Industrial Revolution (Forbes)


  • Gensler grilled by Republicans over SEC's approach to cryptocurrencies (The Block)
  • Draft U.S. Stablecoin Bill Shows Major Difference Between Stablecoins and CBDCs (Coindesk)
  • Signature Bank didn't fail because of crypto, New York regulator says (The Block)
  • Hong Kong Court Recognizes Crypto as Property (Blockworks)
  • First EU-Wide Crypto Regulations Clear Final Parliament Vote (Bloomberg)


  • Staked ether deposits surpass withdrawals for the first time since Shapella upgrade (The Block)
  • Tracking Zero-Knowledge Rollups on Ethereum (Blockworks)


  • An update to Coinbase’s global scale to go broad and deep (Coinbase Blog)
  • US states are filling the void on crypto rules left by federal inaction (Coinbase Blog)
  • The UK as a Web3 innovation hub (Coinbase Blog)

View From Around the World


A Hong Kong court has declared that crypto has property attributes and is "capable of being held on trust." This ruling is related to a case involving Gatecoin, a now-defunct crypto exchange. According to Coindesk, this follows similar rulings in China and the US. A government-funded law commission in the U.K. also found that “crypto can be classified as a new type of property under existing laws in England and Wales.” (Coindesk)


The European Union’s Markets in Crypto Assets (MiCA) regulation was approved by the European Parliament on April 20, offering a legal framework for governing the crypto industry. After the legislation is published in the EU’s Official Journal, which may take place in June, and formally approved by EU member states, the rules could take effect within 12 to 18 months. This would allow a path for crypto exchanges and digital asset service providers to register their companies under the supervision of the European Banking Authority and the European Securities and Markets Authority. (Bloomberg)

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