Hot Features
Premium
Register for Free to get streaming real-time quotes, interactive charts, live options flow, and more.
Everyone seems to be discussing the same subject: cryptocurrencies. Digital currencies have become the main alternative investment people are turning to when they want to diversify their portfolios with projects based on innovative technology because they are developed with the help of blockchain technology, which revolutionizes multiple sectors. Bitcoin and Ethereum have detached themselves from the pack of crypto projects and have been leading the sector for some time now. They are not only the most popular digital currencies but also the largest assets by market cap in the sector. And even if they are competitors, they are correlated because they move in the same direction. While Bitcoin is more expensive than Ethereum, their prices move the same, following almost identical trends.
If you are an investor who wants to add one of both cryptocurrencies to your portfolio and want to predict Ethereum price or Bitcoin value, it’s essential to understand the correlation between the look but also have a closer look to each of them.
Discussing Bitcoin
Bitcoin was first introduced on the market in January 2009 by a mysterious developer or group of developers called Satoshi Nakamoto. Its white paper introduced a novel idea, that of a digital currency that lacks a central authority and has different characteristics from government-issued money. There are no physical Bitcoin coins, and all transactions involving it are completed by a cryptographically secured public ledger powered by blockchain technology.
It’s essential to note that Bitcoin isn’t the first attempt to create a cryptocurrency, but it was definitely the most successful project, especially considering that it has maintained its supremacy in the sector throughout the years. It’s considered the predecessor to all blockchain-based currencies, and because the rest have been developed to provide solutions to its limitations, they have been called altcoins (the short for alternative coins).
Since its inception the concept of a decentralized currency has gained popularity and acceptance worldwide, and several government bodies and regulators have introduced it in the series of assets used for transfers. Bitcoin is recognized as a store of value and means of payments in a couple of countries, and has become a financial system people often rely on when they want to benefit from transparency and security.
Discussing Ethereum
Ethereum unveiled the fact that blockchain technology has extensive potential and can be used for more than just creating digital currencies. It was launched on the market in 2015 and has become the most established decentralized platform to host applications. Ethereum first introduced the notion of smart contracts, which allow people to trade services and assets without the involvement of a third party. It’s considered the largest blockchain-based network, which also hosts decentralized apps that are well-known for not experiencing any involvement from third parties, are not subjected to fraud, and have no downtime. Ethereum is able to do all of this because it has its own programming language. Ethereum virtual machine relies on ETH, its native token, to run applications. It has been developed to decentralize the web and plays a major role in Web 3. The way in which people interact with the web will definitely change in the following years, and Ethereum will be one of the forces driving the change thanks to its applications.
ETH has multiple roles, and the most important ones are:
– It can be used in the Ethereum network to pay for fees and associated transaction costs
– It can be used as a means of payment for purchasing services and products
– It can be used as an investment tool in portfolios
– It can be used as a blockchain-based currency on exchange platforms
While both Bitcoin and Ethereum are cryptocurrencies, they differ in several aspects
Both cryptocurrencies rely on cryptography and the principle of distributed ledgers to function, but their technicalities differ.
Bitcoin has always used the proof-of-work consensus to mine new coins, but Ethereum migrated from the old algorithm to a new one called proof-of-stake, which is eco-friendly. Thanks to the PoS algorithm, Ethereum has enhanced its security and sustainability features, and it’s considered more scalable than Bitcoin.
BTC and ETH are digital currencies, but ether aims to power smart contracts and decentralized apps, and be more than a simple digital currency. BTC’s main purpose has always been to offer people with a digital currency, so it has widely remained the same since its inception. Bitcoin has become a store of value in time because it works as a hedge against inflation and people turn to it when they want to store their wealth in a way that allows them to access it worldwide.
Why are Bitcoin and Ethereum correlated, despite being so different?
The fact that Bitcoin and Ethereum are widely used as digital currencies correlates with their price evolution. They also move according to the same trend because they are stores of value, can be used as mediums of exchange, and are based on the same blockchain technology. Not only the two of them, but the entire market is subjected to the same forces in the sector and investor sentiment. This is why all cryptocurrencies dipped during the bear market when investor sentiment was negative. Also, regulatory development in Bitcoin impacted the performance of all digital currencies because people gained more trust in the overall category.
Bitcoin and Ethereum are the two largest cryptocurrencies by market cap, so they are available on most trading exchanges. As a result, when one suffers changes in value, the other will follow suit. This strong presence in the industry also contributes to them being connected because together they set the tone for the entire industry. When they suffer dramatic drops in value, it will function as a domino effect on the other digital currencies, which aren’t able to maintain their price stability for long.
What should this correlation mean for investors? They should make informed decisions based on the knowledge that while they perform differently, their prices will follow the same direction. Depending on the specifics of one’s portfolio, they could decide which ones will benefit them best.
Image source: https://unsplash.com/photos/a-pile-of-gold-and-silver-bitcoins-kM6QNrgo0YE
