Crypto Weekly: Was that mainly hopium? Crypto Weekly: Was that mainly hopium? Crypto Weekly: Was that mainly hopium?

Crypto Weekly: Was that mainly hopium?

Mads Eberhardt

Cryptocurrency Analyst

Summary:  Following the successful Ethereum merge last week, Ethereum has led a downward trajectory among cryptocurrencies, indicating that the price development in the past months has been driven by hopium. Despite this, the correlation between Bitcoin and S&P 500 is almost at a record high.

The market sells the news of the Ethereum merge

The second-largest cryptocurrency Ethereum successfully underwent its merge on Thursday last week, changing its consensus framework from proof-of-work to proof-of-stake. The event has been highly anticipated for years in the Ethereum community. Although the merge occurred flawlessly, market participants were liquidating Ethereum positions following the merge. In a matter of days, Ethereum tumbled by around 20% from 1,605 to 1,290 (ETHUSD), leading a downward trajectory in the crypto market, with Bitcoin plunging by around 4.5% over the same period.

The decline of particularly Ethereum suggests that the merge was remarkably hyped, leading to a “buy the rumor, sell the news”-event, as Ethereum has posted substantial price gains in the past couple of months in anticipation of the merge. In hindsight, it seems the merge was sort of hopium in times of an environment embedded in unfavorable conditions from macro and global unrest to crypto native contagion with various crypto companies that have filed for bankruptcy.

With that being said, the merge technologically limits the selling pressure of newly issued Ether, since the yearly issuance of Ether has declined by nearly 90% after the merge - from 5.4mn Ether to currently around 0.6mn Ether. To stress this, the Ethereum supply has increased by 3,600 Ether since the merge. If the merge had not occurred, the supply would instead have increased by 64,800 Ether. It is important to note that the effect of the issuance drop is not expected to be seen in the short term. Miners are still owning a noticeable amount of Ether, which they may continue to sell in the foreseeable future. In comparison, after the latest Bitcoin halving in 2020, which cut the mining reward in half, the Bitcoin price did not move by much in the next 6 months.

Crypto-equity correlations at record-highs

Yet, it is arguably not only hopium that has affected the crypto market lately. Once again we must turn our attention to the stock market, which we have done countless times this year so far. The 60-day correlation coefficient for Bitcoin and the S&P 500 is presently at above 0.7 as shown in the chart below, and it is very close to the all-time high correlation in May this year. A high correlation implies that the crypto market is behaving similarly to news on global unrest, rising interest rates, and inflation. First, this may suggest a potential relief in the crypto market is likely to be ignited by a positive sentiment shift in equities. Secondly, this means that crypto offers less diversification in a portfolio than previously.

Correlation between Bitcoin and S&P 500 - 60 day correlation coefficient. Source: Bloomberg
Bitcoin/USD - Source: Saxo Group
Ethereum/USD - Source: Saxo Group

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