All markets are correlated to a greater or lesser extent thanks to similarities in geography, politicians, regulation, macroeconomic decisions, and – most importantly – the whims of asset allocators. In light of the Federal Reserve announcing a raise in interest rates, the stock market is currently falling alongside crypto markets, and many cryptocurrency investors are hoping that the correlation can decouple, so that the price of ETH can pump.
Crypto’s correlation with the stock market
Over longer-term time frames, cryptocurrencies have been extremely uncorrelated to the stock market as an asset class, given that the blue chips which shape the industry have exponential growth patterns rather than linear ones.
However, in the short term and medium term, cryptocurrencies are highly correlated to the stock market – a pump in the stock market likely means a pump in the cryptocurrency markets ceteris paribus, and vice versa.
There are many reasons for this, and many reasons for why correlation to traditional markets has increased somewhat over the past few years now that the asset class has matured somewhat.
Nevertheless, there are many cryptocurrency investors, particularly Bitcoin investors, who decided to allocate to the asset class precisely because they believed that it could function as an uncorrelated asset class (and perhaps even an inflation hedge).
If those investors are looking at cryptocurrencies using linear charts rather than logarithmic and are thus thinking about the price in a short-term way, they are inevitably going to be surprised and let down by the volatility and high degree of correlation – particularly that we are now in the midst of a bear market.
Analysts predicting an Ethereum pump
Now that the merge has been completed, many analysts are predicting that the price of ETH could rise quite significantly in the coming months.
The completion of the transition from proof of work to proof of stake has meant that one of the largest risks in Ethereum’s future development as a protocol has now largely passed – there were concerns that despite all of the testing and verification, the transition to proof of steak could have come with some bugs.
Fortunately, the transition was completed relatively smoothly, with the largest ongoing existential threats to Ethereum’s security being the high degree of centralization amongst validators.
The changing architecture of Ethereum is bullish for the price of ETH for many reasons.
Under the proof of work architecture, miners were being paid a lot of ETH in block rewards and for transaction fees. Now that Ethereum runs on proof of stake, there are no miners, and the inflation rate has thus been reduced.
Changes made in EIP-1559 guaranteed that Ethereum would always be burning at least some ETH, and this means that during periods where transaction fees are especially high, the asset becomes deflationary.
Ironically this means that with every liquidation cascade in DeFi (when higher gas fees are triggered organically as bots rush to liquidate undercollateralised lenders), the asset becomes more desirable to invest in based on fundamentals, since ETH becomes far more deflationary during these periods.
Furthermore, the move from proof of work to proof of stake means that Ethereum is now ESG-compliant, which is hugely important since many asset allocators around the world have mandates to allocate to ESG.
Staking is easier to participate in than mining
One of the main advantages to proof of stake is that it doesn’t require a lot of hardware in order to be able to participate in the network.
Validators can participate for as little as 32 ETH to earn staking rewards. This may seem like a lot, but when one compares it to the upfront costs of mining Bitcoin it isn’t so bad.
Whilst it is technically true that one could try to mine Bitcoin from their computer, realistically the hardware required to mine blocks is expensive.
Not only this, but mining is an industry with far more factors to consider than staking.
Bitcoin miners have to consider regulation, energy prices where they are based, what hardware they need and how to acquire it, and how profitable it may be to continue to mine after the next Bitcoin halvening – with proof of stake, there are far fewer variables for the average retail investor to consider, and this may be one of the reasons that many retail investors find themselves more attracted to Ethereum than to Bitcoin in the next cycle.
Earning staking rewards can be made even easier on Ethereum than this. Lido is a liquid staking provider that allows people to stake ETH for stETH, which is a yield-bearing version of ETH that can be used in DeFi. This extra functionality and utility that Ethereum can offer makes it a lot more useful than Bitcoin in a lot of ways, which has no smart contracts on its native chain.
If someone wants to use Bitcoin in DeFi, then they must contend with other counterparty risks, such as safety of the custody of WBTC and BTCB, and even bridge risks for assets like WBTC.e and renBTC.
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Author: Jamie McNeill
Jamie is an expert in DeFi, blockchain consensus models, and changing governance models in the decentralized space, often commenting on those emerging technologies on Twitter. He has a penchant for sociology and cycles of human behavioral patterns. Currently Jamie works at B2C as a crypto news content writer, and also
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