Is Ethereum Inversely Correlated to Bitcoin?

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The digital currency space has today seen a somewhat rare market behavior as Ethereum is up while bitcoin and many other digital currencies have fallen in price.

Recently, we have seen bitcoin go up for a day or so, while all other digital currencies go down. Eth going up while other digital currencies (minus ripple and ripple clones) go down appears to be a first.

Current market action for the top six digital currencies

This might suggest that ethereum may be starting a bid to play the store of value role and become a gateway to other digital currencies like bitcoin because ethereum is one of the very few digital currencies, besides bitcoin, which is traded against other digital currencies in say ETH/ZEC fashion.

Ethereum, therefore, may be creating its own revolving ecosystem due to one significant advantage, eth based tokens. They usually are bought with eth and traded against eth. There are many of them, valued at $1 billion, with significant trading volumes.

Moreover, conversion of eth to fiat is now becoming almost as easy as for bitcoin to USD, especially after Coinbase added the currency last year, followed by others, with eth’s symbol now fairly ubiquitous.

Bitcoin continues to have its unique altcoin ecosystem which revolves around it as far as trading is concerned, but, uniquely, eth might be coming out of that solar system and may be creating its own revolving planets.

That’s shown by eth’s inverse correlation, especially in the past few days, as indicated by the below image which illustrates an eth upwards movement at the same time as a bitcoin downwards movement, potentially because bitcoiners or other altcoiners may be buying eth.

Ethereum and bitcoin correlation on a shorter timeframe

On a longer timeframe, the correlation isn’t too clear. There are times when the two main currencies move in the opposite direction, as can be seen there around the middle of the 1d timeframe chart below, but sometimes they both move up at the same time.

Ethereum and bitcoin correlation on a longer timeframe

That may suggest the currencies do affect each other, but are not tied to one another as each has their own factors unrelated to the other currency which may overcome any correlation.

On the other hand, the one-day timeframe may be hiding the scale of movement for each currency. They both have indeed gone up, but ethereum has increased in value much faster than bitcoin which has not even doubled for this year.

That might be because while bitcoin continues to attract investors, it is doing so at a lower rate than ethereum, either because bitcoin investors are diversifying or new investors are choosing eth rather than bitcoin at a greater rate.

The final factor to mention is the number of transactions which is usually highly correlated to price. Ethereum’s transaction volumes are now almost half of bitcoin’s, standing at around 110,000 to bitcoin’s 250,000.

Ethereum’s current transaction volumes – source etherscan

That may be only because bitcoin’s transaction capacity is limited, but whether that overcomes the correlation of price to transaction volumes is not very clear because logically the amount of use – utility – should correlate to value regardless of whether it is lowered artificially because utility would be artificially lowered too.

Furthermore, network effects are a known factor and ethereum is building some unique ones while also gaining some from bitcoin through businesses and individuals diversifying due to high fees and delays.

That diversification might explain the inverse correlation at times when other factors which only affect bitcoin do not come into play and push up the price despite bitcoiners diversifying. Thus, in some cases, hiding what may be a continued inverse correlation but in a hidden manner by, instead of bitcoin falling, it rising at a lower amount than otherwise.

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