Bitcoin & Ether diverging amid regulatory storm & post-Merge market

Now ten months on from the Merge in September, Ethereum presents as a very interesting case study. Its makeup transformed entirely as it switched from a proof-of-work consensus to proof-of-stake. Recently, we may be seeing signs that this shift is affecting how Ether trades on the market, as well as some other factors which we will delve into. 

Firstly, Ether’s correlation with Bitcoin has dipped to its lowest level since 2021, not including the brief dive in September when the Merge went live. While the correlation still remains extremely high at 0.72 (using the 60-day Pearson metric), the downward trend in the last couple of months is notable. 

Of course, this time period coincides with a pickup in the aggressive regulatory crackdown in the US, which is the likely cause of this fall in correlation. Bitcoin appears to be carving out its own niche within the crypto regulatory landscape, perhaps not quite as impacted by the hostile stance of US lawmakers as Ether would be. 

We kind of got this information from the SEC that, well actually everything other than Bitcoin is a security. And we kind of said to ourselves well, that’s not our understanding of the law

Coinbase CEO Brian Armstrong

In truth, it takes us to the heart of what Bitcoin and Ethereum strive to achieve – and what the market believes they do, or will do in the future. For Bitcoin, its grand vision is to claim the title of a reputable store of value, a monetary asset outside the control of governments and centralised institutions. Or, “digital gold”, as the popular moniker goes. 

In order to achieve that goal, it has made tradeoffs. Security and decentralisation are paramount, but this comes with the downside of not being as adaptable or perhaps as complex as other blockchains. Which for Bitcoin’s goal, is not a problem. Ethereum, on the other hand, has shifted to proof-of-stake and moved further away from Bitcoin because it will never be (or does not want to be) anything akin to digital gold. It has different goals. 

Ethereum’s aim is to be the base layer of a decentralised economy. Personally, a big part of that goal for me is the tokenisation of assets. Currently, Ethereum – and DeFi at large – are not useful for most real-world tasks. If or when assets become tokenised and tradeable on chain, that will change. However, that requires regulation to open it up to the masses and facilitate this on-chain movement. 

Bitcoin differs here in that it isn’t quite so dependent on regulation to achieve its goal. In a roundabout way, this could also be contributing to the fall in correlation in recent months, as the SEC tightens its grip on the sector. 

Additionally, we can see in the following chart that not only has the correlation fallen, but Ether has underperformed Bitcoin since the Merge went live.  

This is notable because, since the Merge in September, crypto prices have soared. In previous cycles, following an initial jump by Bitcoin, altcoins tend to print more gains than Bitcoin when the market is pumping. Perhaps if the rally sustains, this will happen again, but prices have been on the up for eight months now while ETH/BTC has been falling. 

This likely says more about Bitcoin carving out its own niche, as discussed previously, than it does about Ether specifically. If we assess Bitcoin dominance (the ratio of the Bitcoin market cap to that of the cryptocurrency sector), we see it has been rising steadily since the same time, from around 40% at the time of the Merge to above 50% today. 

As the crypto market continues to mature, we could see Ether’s correlation with Bitcoin continue to drop. Today, so much of the market is pure speculation, helping to keep these assets tied at the hip, as with all cryptos – for the most part, one can describe the price action of the majority of altcoins as levered bets on Bitcoin. 

However, with Bitcoin striving to become a monetary asset and Ether a technological layer built to facilitate a future of smart contract-driven disruption, if these two assets move towards achieving their goals, a decoupling will only be natural in the future. 

Because beyond being domiciled on something called a blockchain, Bitcoin and Ether really don’t have much in common. And since the Merge, those blockchains are entirely different, too. 

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