The sharp decline of Bitcoin often triggers systemic contagion, driving altcoins down through liquidity and confidence channels.
During a crisis, the market tends to view cryptocurrencies as a single risk asset rather than assessing individual utility, which is evident in the high BTC-ETH and BTC-XRP correlations.
Correlation and beta analysis are crucial for quantifying Ethereum and XRP's dependence on Bitcoin's performance.
Monitoring correlation metrics, using derivatives, and maintaining stable or yield-generating assets can help hedge against Bitcoin-related shocks.
Bitcoin's dominance in the cryptocurrency market has long been a defining feature of crypto cycles. But what happens if Bitcoin's dominance weakens or its price plummets by 50%? In this scenario, Ethereum and XRP, the two major coins, will become key test cases for market restructuring. This article explains how to assess ETH and XRP during Bitcoin shocks, measure dependence, evaluate risks, and develop effective hedging strategies.
In traditional stock markets, when the largest player in an industry encounters problems, the chain reaction is immediate. Smaller companies often lose value because they rely on the leader's ecosystem, investor confidence, supply chain connections, and reputation. The same logic applies to cryptocurrencies: Bitcoin acts as an "anchor asset." When Bitcoin weakens, the entire market loses stability and direction.
Historically, Bitcoin has held a significant share of the market capitalization in the crypto market, referred to as the "dominance" metric. Most altcoins, including Ethereum and XRP, have shown strong correlation with Bitcoin's price movements.
For example, after the tariff announcement on October 10, 2025, the crypto market experienced a widespread liquidation event, with Bitcoin dropping significantly. According to CoinMetrics, the BTC-ETH correlation rose from 0.69 to 0.73, while the BTC-XRP correlation increased from 0.75 to 0.77 over the next eight days. This sharp convergence confirms that in a liquidity crisis driven by macroeconomic fears, altcoins do not decouple based on their individual utility. Metrics like Ethereum's trading volume or XRP's institutional adoption provide little protection in such cases.
Conversely, high positive correlation serves as an empirical measure of shared systemic risk. It indicates that the market views the entire crypto industry as a single asset class. This amplifies the downstream impact of a BTC-led collapse on ETH and XRP.
The implication is clear: if Bitcoin's dominance declines or its price crashes, ETH and XRP are unlikely to move independently. They may suffer losses through two channels:
Market structure, including derivatives, exchange liquidity, and BTC-related investor behavior, weakens. A significant collapse of Bitcoin could trigger large-scale liquidations driven by margin calls and cascading sell-offs. This often leads to massive capital outflows, impacting all crypto assets regardless of their fundamentals. They decline simply because they share the same risk basket.
The collapse of the original decentralized asset undermines the core argument of the entire crypto industry. It erodes investor confidence in the long-term viability of cryptocurrencies. When fear prevails, investors tend to turn to safer assets like fiat currencies or gold. The result is a prolonged bear market that diminishes investment interest in Ethereum and XRP.
Analysis begins with selecting a reasonable, high-impact Bitcoin event. This may involve defining a specific price shock, such as Bitcoin dropping 50% within 30 days, or a structural change, such as Bitcoin's dominance falling from 60% to 40%.
The next step is to calculate the current Pearson correlation coefficient between ETH, XRP, and BTC. This statistical measure captures the linear relationship between the daily returns of the assets, providing a baseline for dependence. The closer the value is to +1, the more closely the altcoins' performance is related to BTC.
Using correlation data, apply regression analysis to calculate the beta (β) of each altcoin relative to BTC. The beta coefficient estimates the expected price change of the altcoin for each unit change in Bitcoin. This is similar to calculating the beta of a stock relative to a benchmark index like the S&P 500 in traditional finance.
For example, if ETH's β relative to BTC is 1.1, and the defined scenario assumes BTC drops 50%, the implied change for ETH would be -55% (1.1 × -50%).
Adjustments need to go beyond simple beta calculations, considering key market structure risks. Weak exchange order books should be analyzed to account for liquidity risks, while high derivatives open interest should be assessed to evaluate structural risks and potential cascading liquidations.
For instance, if the implied -55% change from step 3 is exacerbated by a lack of liquidity, the actual realized loss could increase by another 10%, leading to a total decline of -65%. Additionally, reviewing open interest and margin positions is crucial, as high leverage may accelerate declines through cascading liquidations.
In traditional finance, a sharp sell-off in the S&P 500 or a sudden collapse of a major broker often triggers rapid, indiscriminate risk-off behavior—an effect known as "financial contagion." The cryptocurrency market exhibits similar dynamics, but often in a faster and more amplified manner, typically triggered by shocks centered around Bitcoin.
Data from past crises, including the FTX and Terra collapses, reveals a clear pattern: when Bitcoin declines, altcoins are often dragged down. Bitcoin continues to serve as the primary risk indicator for the market.
In such cases, liquidity often flows into stablecoins or completely exits the market to seek protection from volatile assets. Although Ethereum benefits from strong first-layer utility, it is not immune; under market pressure, its correlation with Bitcoin typically increases as institutional capital views both as risk assets. However, Ethereum's staking lock-up and extensive decentralized application ecosystem may provide a utility-driven bottom, potentially helping it rebound faster after the crisis subsides. On the other hand, assets like XRP, facing higher regulatory and structural risks and lacking Ethereum's broad, natural on-chain yield mechanisms, may suffer disproportionately. This shock often triggers a vicious cycle where the loss of collective confidence outweighs the fundamental utility of the tokens, leading to an overall decline in market correlation.
Did you know? While Bitcoin is generally uncorrelated with the S&P 500, during periods of extreme financial stress—such as the COVID-19 pandemic—its correlation with stock indices often tightens significantly.
Hedging a crypto portfolio against a sharp decline in Bitcoin requires more than basic diversification. Systemic shocks indicate that extreme correlations often erase the benefits of risk diversification.
During extreme panic, futures markets may trade at significant discounts to spot prices. This creates opportunities for seasoned traders to hedge volatility with relatively low-risk non-directional spreads rather than taking on directional price risk.
Holding positions in tokenized gold, real-world assets (RWAs), or fiat-backed stablecoins can help maintain portfolio value. These assets act as liquidity reserves during a downward spiral in the crypto market.
Tracking the rolling short-term correlation of ETH and XRP to BTC can serve as a real-time warning signal indicating when the benefits of diversification are fading. It confirms when immediate hedging action may be necessary.
Shifting part of the holdings into staking, lending, or liquidity pools that generate returns regardless of market direction can help. Stable yields can offset valuation losses and enhance recovery potential.
Related: As the Federal Reserve cuts rates and Trump makes trade remarks, Bitcoin (BTC) ETF sees $470 million outflow.
Original article: “What Happens to Ether and XRP Without Bitcoin?”
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