Bitcoin and Ethereum: Twins, Cousins or Just Good Friends?

23 Pages Posted: 5 Feb 2022

Date Written: December 15, 2021

Abstract

Bitcoin and Ethereum have been at the top of the cryptocurrency market, in terms of market capitalization, since January 2018. Bitcoin, proposed in 2009, is a decentralized digital currency that enables payments to anyone, anywhere in the world with no central authority. Ethereum, went live in 2015. It can be used as a currency but it also includes a decentralized, open-source blockchain with smart contract functionality. The smart contract function allows for the exchange of NFTs (non-fungible tokens) connected to digital works of art or other real-world items and sold as unique digital property. Ethereum, like Bitcoin, uses a proof-of-work protocol in the validation of new transactions, but unlike Bitcoin, Ethereum has no supply cap.

An analysis of the two coins from January 2018 to September 2021 finds they have more in common in the 2018 to 2020 period than in 2021, both in terms of daily price and trading volume movement. By 2021 this consistency begins to falter, particularly in the first six months of the year, when price and trading volume show little or no relationship. The popularity of NFTs does not appear to have any impact on Ethereum’s price or daily trading volume. Although the sale of NFTs grows considerably in 2021, they represent only a small percentage of Ethereum’s daily trading volume.

These are two of the most successful cryptocurrencies, there are times when they both react in the same way to market conditions, but this is not always the case. Prices and trading volume move in the same direction around 80% of the time, which implies that for 20% of the time they do not respond in the same way to market conditions. This has implications for any Ethereum automated trading strategy based on the price movement of Bitcoin. They react more as part of the cryptocurrency family. So are they twins, cousins or just good friends? The answer would be cousins.

Keywords: Bitcoin, Ethereum, NFTs

JEL Classification: F30, F65, G15

Suggested Citation

Johnson, Jackie, Bitcoin and Ethereum: Twins, Cousins or Just Good Friends? (December 15, 2021). Available at SSRN: https://ssrn.com/abstract=3986572 or http://dx.doi.org/10.2139/ssrn.3986572

Jackie Johnson (Contact Author)

Johnson Research, Perth ( email )

PO Box 440
Bullcreek, WA 6149
Australia

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