Exploring the BTC/ETH correlation and how to trade it

Bitcoin and Ethereum stand as the top two cryptocurrencies by market cap today, and have held these leading positions for some time. However, each asset represents a different form of innovation, blockchain philosophy, and use case. 

Bitcoin was the first cryptocurrency to arrive and remains the most popular digital asset to date. It's primarily considered ‌a store of value, often called digital gold. Meanwhile, Ethereum arrived around six years after Bitcoin’s launch. 

Ethereum brought with it ‌smart contract functionality — a significant development and one that differentiated the token and network from Bitcoin. Ethereum became the largest decentralized application (DApp) platform, making it the second-most popular cryptocurrency. 

The two cryptocurrencies, put together, make up more than 70% of the market at the time of writing. Naturally, the price action of the two cryptocurrencies are connected to each other, giving a unique insight into the market. In this article we’ll explore the correlation between BTC and ETH and how you can leverage this relationship to make informed trading decisions. 

What is the BTC/ETH correlation?

The BTC/ETH correlation refers to the relationship in price movements between Bitcoin and Ethereum. It's usually expressed in terms of BTC. So, the BTC/ETH correlation refers to the amount of BTC it costs to buy one ETH. 

Consider that the price of one Bitcoin is $60,000 while one Ether is valued at $3,000. In this scenario, the ratio would be 0.05, as it would cost 0.05 BTC to buy one ETH. If the price of ETH goes up faster than that of BTC, it would cost more BTC to buy ETH. 

Another measure of the assets’ link is the correlation coefficient. It ranges from -1 to 1 and measures the relationship of the price movements with respect to each other. If the correlation coefficient is 1, it indicates that both assets are moving in the same direction. Conversely, if the coefficient is -1, there's a strong negative correlation. During periods of negative correlation if the price of Bitcoin goes up, ETH would go down, and vice versa. Similarly, if the coefficient is 0, it means there’s no relationship between the two assets. 

BTC/ETH correlation is the price relationship between BTC and ETH. Meanwhile, the correlation coefficient refers to how the price of the two assets move in relation to each other. Although both are different, they’re mutually necessary to trade the correlation efficiently. 

Impact of BTC/ETH correlation on the market

The BTC/ETH correlation coefficient is measured on a 30 to 60-day rolling window. While both assets have been very closely correlated, the gap has widened since Ethereum’s Shanghai update in 2023. 

Institutional traders are adopting Bitcoin as a means of exposure to the cryptocurrency market. However, a lower correlation could shake this up. Traders would also have to hold Ethereum alongside Bitcoin for better exposure to crypto markets. 

Analyzing historical BTC/ETH correlation trends

Looking at historical data, Ethereum is priced higher during bull markets. ETH was priced at over‌‌‌ 0.05 BTC in the 2018 and 2021 bull runs. After 2021, 0.05 BTC has served as a good support region. Similarly, 0.08 BTC has served as a major resistance in three different instances in the past. 

The graph below shows that Ethereum performs better than Bitcoin in bull markets and worse in bear markets. It’s important to remember that future price action can't be predicted based on past performance. However, it can be used to make more informed decisions. 

Why trade the BTC/ETH correlation?

The BTC/ETH correlation is similar to the gold/silver ratio in the metals space. It's used to observe price movements over time based on macroeconomic or market-specific trends. Similarly, the BTC/ETH correlation points to overall market trends with respect to the two most popular cryptocurrencies. 

Many traders choose to trade BTC and ETH based on their correlation directly. Some use it for hedging, while others use it to observe market insights. For example, a change in correlation might signal a shift in market sentiment. Some traders believe that when money flows from Bitcoin to Ethereum, the market is more bullish for altcoins and therefore add them to a diversified portfolio. Similarly, traders generally have less money to allocate to other altcoins when money flows from Ethereum to Bitcoin. 

Strategies for trading the BTC/ETH correlation

The dynamic nature of the relationship between Bitcoin and Ethereum can be used to set up different trading strategies. Below are some of the most common ways the BTC/ETH correlation is used. 

1. Pair trading: This involves trading both BTC and ETH simultaneously based on the relative strengths between the two assets. If the price of ETH goes up relative to that of BTC, the trader places a long order on ETH and a short on BTC. 

2. Hedging: Traders use the BTC/ETH correlation to hedge their positions and manage risks. For example, the trader holds BTC and expects a downturn. If the BTC/ETH correlation is in a similar direction, the trader could short ETH as a hedge. 

3. Correlation trading: Here, you can trade the BTC/ETH correlation itself. The most common method of trading cryptocurrencies is against stablecoins via stablecoin trading pairs. However, you could also trade Ethereum against Bitcoin since these markets exist on OKX and other exchanges. BTC/ETH trading pairs have separate technical analysis indicators, giving you unique opportunities that might not be visible while trading against stablecoins. 

4. Diversification: The BTC/ETH correlation can be powerful even if you’re not actively trading it. If current market conditions suggest that Bitcoin and Ethereum are heavily correlated, you might want to consider diversifying your portfolio in other less correlated assets to mitigate the risks. 

How to trade the BTC/ETH correlation

You can trade the BTC/ETH correlation on most major centralized and decentralized exchanges. OKX offers a safe platform with deep liquidity and convenient tools for both beginners and experienced users. 

Trading BTC/ETH correlation on OKX 

You can directly trade the BTC/ETH trading pair on OKX by following the process below.  

Step 1: Create an account on OKX.

Step 2: Fund your account with either BTC or ETH. 

1. If you already have BTC or ETH, you can fund your OKX account with it. For this example, we'll be depositing BTC. 

2. Head over to “Assets” in the top-right corner and select “Deposit.”

3. Select “BTC” as the crypto to deposit and “BTC-Bitcoin” as the network. 

4. Deposit Bitcoin from your crypto wallet to the address shown to fund your OKX account and get started with trading. 

Step 3: If you don't already have any crypto to trade with, you can buy some on OKX. Here’s how.

1. Head to “Buy Crypto” at the top and select “Express buy.” 

2. Select the currency of your choice and enter the amount of crypto you want to buy.

3. In the next step, choose your preferred payment method and select “Next”. 

4. You’ll be shown a final confirmation. Here, select “Buy”. 

5. Once the payment is confirmed, the cryptocurrency will be deposited into your account and become available to trade. 

Step 4: Now that you have some crypto in your account, head over to “Trade” at the top and select “Spot.” 

Step 5: Select the ticker on the left and type “ETH/BTC.”

Step 6: You can now trade ETH against BTC. Select “Buy” if you want to increase your exposure to ETH and decrease your exposure to BTC. If you’re bullish on BTC, buy Bitcoin instead. The chart below is the BTC/ETH correlation, which you can use to inform your trading decisions. 

Trade BTC/ETH correlation on the OKX mobile app

The OKX mobile app is another convenient place to trade BTC/ETH correlation. 

Step 1: Download the OKX mobile app for iOS or Android, depending on your platform. 

Step 2: Sign in to your OKX account. If you don't already have an account, select ‘Sign up’. 

Step 3: You need to fund your account with either BTC or ETH. Follow the steps below. If you already have enough funds in your account, see step 5. If you don’t have any funds to trade with, see step 4. 

1. Select ‘Assets’ at the bottom and choose ‘Deposit.’

2. Search for ‘BTC’ and follow the instructions to deposit BTC in your account. 

Step 4: If you don’t have funds to deposit, you can buy BTC on the OKX mobile app. 

1. Select the OKX menu from ‌the top-left corner. 

2. Select ‘Buy’ under ‘Manage assets.’

3. Choose ‘BTC’ and enter the amount of BTC you want to buy. 

4. In the next step, select your payment method and follow the instructions shown for the payment method of your choice. 

5. Once the payment is successful, your BTC should be ready and available to trade in your account. 

Step 5: Now that you have funds available, it's time to trade. Select the ‘Trade’ option from the bottom navigation. 

Step 6: By default, the platform opens on BTC/USDT. Tap the asset pair at the top left and type ‘BTC/ETH.’ You can trade the BTC/ETH correlation on both spot and margin. Choose one. 

Step 7: Select ‘Buy’ to increase your exposure to ETH and decrease your exposure to BTC. If you’re bullish on BTC, buy Bitcoin instead.

The OKX mobile app is a robust application that offers convenient trading from anywhere without compromise. It's feature-rich with charts, advanced order types, and bots you’ll also find on the desktop. 

Tips for trading BTC/ETH correlation

• Understand BTC/ETH correlation and correlation coefficient Both correlation and correlation coefficients are different, and both are useful for trading BTC/ETH correlation. The correlation coefficient helps you to determine how the correlation would behave. 

• Keep an eye on market sentiment: Market sentiment heavily influences both BTC and ETH. If both assets are heavily correlated, positive or negative news for one asset could also impact the price of the other asset. 

• Risk management: Use the correlation to diversify your portfolio. Further diversification should be considered if both BTC and ETH are heavily correlated and most of your portfolio consists of the two assets. 

• Use technical analysis: Consider using the BTC/ETH correlation for your trades even if you’re not directly trading it as it could have an impact on the overall market. It can help identify support, resistance levels, and potential reversal points. 

• Have a clear strategy and be flexible: It's essential to have a clear strategy for every trade. At the same time, be ready to adjust your strategy as the market evolves. 

The final word

The BTC/ETH correlation offers a unique lens into the complexities of the cryptocurrency market. Understanding the dynamics between Bitcoin and Ethereum is crucial for any trader looking to capitalize on ‌market movements. 

BTC/ETH correlation provides significant insights for pair trading, hedging, correlation trading, or diversification. It's recommended to approach correlation trading by diligently completing technical analysis and studying the current market conditions. 

At the same time, it's essential to exercise caution. Historical and current trends aren't a reflection of future trends. However, you can be better equipped to make well-informed decisions with a good understanding of the BTC/ETH correlation.