Ether (ETH) seems to be more and more correlated with the S&P 500. Here’s what’s going on and what it means for Ethereum’s Merge. 👇
An Okcoin – OKX research partnership.
- In 2021, institutional investors began heavily investing in ETH, giving it the standing of a serious tech investment.
- ETH’s 30 day correlation matrix with the S&P 500 has gone up by a factor of 5 since 2017.
- It’s not clear how much traditional finance institutions take into account Ethereum’s underlying technology in their investment choices.
- Ether’s price could be driven more by wider market conditions than by positive sentiment about the Merge.
What we mean when we say “correlated”
Correlation means two assets move in the same direction at the same time — when one goes up, the other goes up; when one goes down, the other goes down. But correlation doesn’t mean causation. One of the correlated assets might be causing the other one to move with it, or it might not. Correlation also doesn’t mean that two assets move in the same direction with the same velocity.
If you put $1,000 into the entire S&P 500 on January 1, 2017, today you’d be up over 84%. Not bad. If you put the same $1,000 into ETH on January 1, 2017, today you’d be up over 19,000%. Wow.
In this sense, ETH and the S&P 500 seem to be increasingly correlated. The 30-day historical correlation matrix is a statistical measurement of the relationship between two assets’ prices. It varies between:
- 1: The assets are perfectly positively correlated, meaning their prices always move in exactly the same direction.
- Minus 1: The assets are perfectly negatively correlated, meaning their prices always move in exactly opposite directions.
On January 2, 2017, the ETH-S&P 500 correlation matrix was 0.17, about 17% positively correlated. On August 29, 2022, the correlation matrix was 0.84, about 84% positively correlated.
Other cryptocurrencies show differing degrees of correlation to the S&P 500. Bitcoin‘s correlation matrix is 0.64. Solana, 0.48. Doge, 0.42. But Ethereum shows a particularly high correlation.
To a certain extent, ETH and the S&P 500 have always been correlated, because ETH’s price has always responded to the same wider market conditions that move the S&P 500. The 2017-2018 crypto winter roughly correlated with an overall drop in US economic conditions (measured by the Purchase Managers’ Index, or “PMI”).
During that time, Bitcoin’s price fell by approximately 80% and Ether’s price fell by approximately 90%. But during that same period, the S&P 500 actually rose slightly. So, ETH and the S&P 500 have not always held hands through ups and downs.
The truth is that the correlation between ETH and the S&P 500 is a bit messy. Sometimes they’re highly correlated. And other times they’re not. However, what seems clear is that their correlation is getting more consistent over time.
Here’s a graph of the ETH-S&P 500 correlation matrix for 2018 – bumpy.
Here’s the same graph for 2020 – smoother.
And here’s the same graph for 2022 – smoothest.
So what’s going on here? Why do the S&P 500, a 65 year-old stock index, and ETH, a scrappy upstary blockchain created by a 20-something computer nerd who favors purple pajamas and cat bags, seem to be falling in love with each other?
It’s probably the same reason why Ethereum and the FTSE have a correlation matrix of 0.74. And why Bitcoin and the S&P 500 have a correlation matrix of 0.64. The short answer? Institutional money.
A brief history of institutional investment in ETH
The S&P 500 is a stock index consisting of some of America’s largest corporations. The market makers who drive these stocks’ prices are large legacy traditional investment banks like JP Morgan and Morgan Stanley.
When Ethereum launched in 2015, these banks weren’t especially interested in making big investments in it. Back then, most of them were still trying to decide whether to invest in bitcoin. In fact, institutional crypto investment didn’t begin in earnest until 2018, and didn’t really take off until 2020.
The following year, 2021, institutional investors began taking a serious interest in Ethereum. But with institutional money comes institutional thinking. Thus, the same minds who are driving the price of the S&P 500 are now also involved in driving the price of ETH – for better or worse.
The upcoming Ethereum Merge presents a fascinating test of this new situation.
Bankers and the Merge
The Merge, expected around September 15, 2022, is a technical upgrade to the Ethereum blockchain that would:
- Transition the network from a proof-of-work consensus mechanism to proof-of-stake
- Make the network over 99% more energy efficient
- Reduce ETH’s total supply
- Prepare the network for a series of subsequent upgrades
Vitalik Buterin, Ethereum’s creator, is excited. Most Ethereum proponents are bullish. And, through the first half of August, the market seemed to agree as the price of ETH steadily rose. But was the Merge driving the price, or was ETH being carried along by a few weeks of positive broader market sentiment?
It’s difficult to prove, of course – remember, correlation does not prove causation.
But it’s noteworthy that after U.S. Federal Reserve Chairman Jerome Powell signaled new interest rate hikes on August 26, the S&P 500 fell, and ETH fell with it.
Now, do ETH’s institutional investors care about the Merge? Proof-of-stake? Deflationary tokenomics? And, looking past the Merge, do they care about the next round of Ethereum upgrades – the Surge, the Verge, the Purge, and the Splurge?
Crypto is no island
Debates and expectations around Ethereum’s Merge are at an all-time-high in the crypto world. Scaling, price, efficiency, fees, you name it: Detailed crypto discussions are ongoing around the clock – mostly from the vantage point of crypto itself. But ETH’s increasing correlation with the S&P 500 should serve as a reminder that crypto is no island – despite all its quirks, it remains very much part of the macro continent.
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