The Ethereum/Bitcoin (ETH/BTC) pair accounts for a significant portion of all Ethereum trading. Ethereum and Bitcoin prices move together most of the time, since they share common investors. Mostly, traders start with Bitcoin, before proceeding on to Ethereum. Another factor that determines their correlation is that both coins are top choices for entrepreneurs looking at ICOs to raise funds.
For blockchain start-ups participating in ICOS, the comparatively lower volatility of Bitcoin makes it a preferable choice. On the other hand, while some developers depend on the Bitcoin network for security and stability, there are others who have faced scalability issues. Ether to them then becomes more viable, as it has fixed transaction fees.
In future, more platforms like NEO will serve as alternative methods of building blockchain solutions for companies, and with that the ETH-BTC correlation will start weakening. In fact, even now, there are times when these two coins do not show any correlation at all. On a monthly basis, experts have found their correlation to range from 0.1 to 0.5.
Ethereum has built its own ecosystem. ETH-based tokens can be bought and traded against themselves. They have a good trading volume, which currently stands at a value of $2.7 billion (24h) and the Ethereum community continues to gain in strength.
All these factors suggest that although Ethereum and Bitcoin prices affect each other from time to time, they are not necessarily tied to each other. For the purposes of trading, it becomes necessary to understand the factors that drive Bitcoin prices.
Factors Affecting Bitcoin Price and Driving the Ethereum/Bitcoin Pair
- Regulatory Issues: The more regulatory bodies circulate around Bitcoin, the more Bitcoin’s price movements are affected. Bitcoin prices fluctuate with the release of press statements and banning of exchanges in important countries. When Japan accepted Bitcoin as legal tender in 2017, prices soared hugely. Now, with major countries like the US and the EU making regulatory frameworks for cryptocurrencies, the volatility of Bitcoin will increase again with no-one quite knowing how potential future legislations will impact the crypto market as a whole.
- Demand-Supply Equation: Miners get rewarded with coins when they crack exceptionally hard codes which are then verified. This process takes place in a controlled manner. The equations are deliberately made complex to keep the amount of coins in circulation less than the fixed value of 21 million Bitcoins. Although Bitcoin has reached nowhere near that circulation figure, its demand is increasing day-by-day which is having an overall impact on price.
- Mainstream Adoption: As Bitcoin gets included as a viable mode of payment by the biggest names, its popularity and usage will increase, which will affect its price. Companies like Amazon have already recognised it, and accept BTC as a payment alternative, which has led to a surge in the coin’s value. The decentralised nature of this currency, with no association to any economy, government or central bank, will make Bitcoin a safe haven for investors in times of crisis. Bitcoin, being in finite supply, is free from the clutches of inflation.
- Media Influence: If the media portrays it as a disruptive currency or associates BTC with drug cartels and terrorists, its value falls. Similarly, ICO bans, like the one in China in 2017 also tend to lead to a price decline. Furthermore, social media plays a role in how the public perceive this digital token with discussions influencing potential investors and contributing to the overall crypto sentiment.
- Technological Advancements: We have already talked about how Bitcoin, along with Ethereum, is used in constructing technologies. ICOs based on Bitcoin increase its value. As academicians start taking an interest in BTC and start building more useful technologies based on it, the value will surge and so will buyer interest.
Technical analysis tools like correlation can be used across asset classes in forecasting, especially for cryptos, as they defy the traditional techniques. Historically, altcoins like Ethereum have mostly moved in tandem with Bitcoin. In the future, as more superior altcoins come into existence, Bitcoin might get disregarded as a benchmark figure. For now, Ethereum is second in market capitalisation only to Bitcoin, but has all the qualities to surpass the latter and lead the way in the future.