Cryptocurrency investors understand that that returns of digital assets are not always moving in the same direction, although the correlation of crypto assets tends to be high. However, following the Ethereum network upgrade of Shapella, the correlation between Bitcoin and Ether is declining and the effect of this could have implications for investors who are looking for hedging strategies.

Analysis from Coinbase suggests that the 40-day correlation of daily returns between the two assets has been falling since mid-March when Bitcoin started to outperform. This decline has become more pronounced since the first-ever upgrade of the Ethereum blockchain, with a similar pattern witnessed in September 2022 following the the Merge update.

Consequently, the weakening correlation could potentially offer more options to institutional investors who rely on quantitative strategies that rely on cross hedging one asset for the other. From a fundamental perspective, it could also support the argument that investors should hold a mix of both Bitcoin and Ether for better diversification.

Coinbase estimates that around 822,000 Ether that is currently locked up due to the upgrade could be unlocked in full withdrawals and may take up to 15 days to process. As investors start to receive their returns, it could lead to further deeper declines in the correlation between the two digital assets.

Overall, the weakening correlation between Bitcoin and Ether could prove to be advantageous for those looking for diversification and hedging strategies, making crypto investing more attractive for fund managers and allowing potential new entrants to access the top tier of digital assets.



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