Key takeaways:
A significant drop in Bitcoin often leads to systemic contagion, causing altcoins to decline through both liquidity and confidence channels.
During market crises, cryptocurrencies are generally perceived as a singular risk asset, rather than being evaluated based on their utility, as indicated by the strong BTC-ETH and BTC-XRP correlations.
Correlation and beta analyses are crucial for measuring Ether’s and XRP’s reliance on Bitcoin’s performance.
Keeping an eye on correlation indicators, utilizing derivatives, and maintaining stable or yield-generating assets can mitigate risks associated with Bitcoin-related shocks.
Bitcoin (BTC) dominance has always been a key aspect of the cryptocurrency market. But what if Bitcoin’s dominance decreases or its value drops by 50%? In such a scenario, two key players, Ether (ETH) and XRP (XRP), will be vital to understanding the market’s adjustments.
This article outlines how to evaluate ETH and XRP during a Bitcoin plunge, measuring dependence, assessing risk, and formulating effective hedging strategies.
Importance of Bitcoin dominance
In conventional equity markets, a fall from the largest player in a sector creates immediate ripple effects. Smaller companies often lose value due to their dependence on the leader’s ecosystem, investor trust, and supply-chain connections. The same principle applies to crypto: Bitcoin acts as the “anchor asset.” When Bitcoin falters, the entire market loses stability.
Historically, Bitcoin has maintained a significant portion of the crypto market’s overall capitalization, known as the “dominance” measure. Many altcoins, including Ether and XRP, have shown a robust correlation with Bitcoin’s price changes.
For instance, following the tariff announcement on October 10, 2025, a broad liquidation event engulfed the crypto market, leading to a sharp drop in Bitcoin. According to CoinMetrics, the BTC-ETH correlation increased from 0.69 to 0.73, while the BTC-XRP correlation rose from 0.75 to 0.77 during the following eight days.
This notable convergence highlights that during a liquidity crisis spurred by macroeconomic anxieties, altcoins do not separate based on individual utility. Metrics like Ether’s transaction volume or XRP’s institutional usage offer little protection under these circumstances.
Instead, the high positive correlation serves as a clear indication of shared systemic risk, reflecting the market’s perception of the entire crypto sector as a single asset class. This exacerbates the adverse effects of a BTC-led downturn on both ETH and XRP.
The message is clear: if Bitcoin’s dominance diminishes or its price crashes, ETH and XRP are unlikely to operate independently. They are likely to be affected through two main channels:
Liquidity/structural channel
A weakened market structure involving derivatives and investor behavior tied to BTC. A significant Bitcoin decline may instigate large-scale liquidations driven by margin calls and cascading sell-offs. This often results in extensive capital outflows affecting all crypto assets, regardless of their fundamentals, leading to declines merely because they share the same risk profile.
Sentiment channel
A failure in the leading decentralized asset undermines the fundamental premise of the entire crypto industry, destroying investor confidence in cryptocurrencies’ long-term viability. As fear spreads, investors typically gravitate toward safer assets like fiat or gold, resulting in a sustained bear market and reduced investment interest in both Ether and XRP.
Measuring Bitcoin dependence and risk
Step 1: Define the shock scenario
Begin the analysis by identifying a plausible, significant Bitcoin event. This could entail a specific price shock, such as a 50% decline in BTC within 30 days, or a structural change, for example, Bitcoin’s dominance dropping from 60% to 40%.
Step 2: Quantify dependence
The following step is to compute the current Pearson correlation coefficient between ETH, XRP, and BTC. This statistical metric captures the linear relationship in the assets’ daily returns, providing a baseline for assessing dependence. A value closer to +1 shows a robust connection to BTC’s performance.
Step 3: Estimate immediate price response
Using the correlation data, implement regression analysis to determine each altcoin’s beta (β) in relation to BTC. The beta coefficient predicts the expected price change of the altcoin for every one-unit variation in Bitcoin, akin to calculating a stock’s beta against a benchmark index like the S&P 500 in traditional finance.
For example, if ETH’s β to BTC is 1.1 and the defined scenario anticipates a 50% BTC decline, the projected ETH movement would be -55% (1.1 × -50%).
Step 4: Adjust for liquidity and structural risk
Adjustments should extend beyond the simple beta calculation to consider significant market structure risks. Analyzing thin exchange order books is essential to gauge liquidity risk, while high derivatives open interest must also be evaluated for structural risk and potential cascading liquidations.
For instance, if the anticipated -55% movement from Step 3 is intensified by shallow liquidity, the actual realized loss could escalate by an additional 10%, leading to a total -65% decline. Additionally, examine open interest and margin positions since high leverage can accelerate declines through cascading liquidations.
Effects on Ether and XRP during a Bitcoin shocks scenario
In traditional finance, a steep sell-off in the S&P 500 or the unexpected collapse of a major broker usually triggers a swift, indiscriminate flight to safety—an effect known as “financial contagion.” The cryptocurrency market mirrors this behavior but often in a more rapid and amplified manner, typically initiated by a Bitcoin-related shock.
Past crisis data, including the FTX and Terra meltdowns, showcase a consistent trend: when Bitcoin falters, altcoins tend to follow suit. Bitcoin remains the principal risk gauge for the market.
In such circumstances, liquidity often flows into stablecoins or exits the market entirely in search of stability from volatile assets. Despite Ether possessing substantial layer-1 utility, it is not immune; its correlation with Bitcoin tends to rise during market strain, as institutional capital considers both as risk assets. However, Ether’s staking lock-up and extensive decentralized application network might offer a utility-driven support, potentially aiding a quicker rebound after the crisis.
Conversely, assets like XRP, which face greater regulatory and structural challenges and lack Ether’s comprehensive, organic on-chain yield options, could suffer disproportionately. Such shocks often incite a vicious cycle where a collective loss of confidence overshadows fundamental token utility, propelling a correlated market-wide decline.
Did you know? While Bitcoin generally does not correlate with the S&P 500, during extreme financial strain—like the COVID-19 pandemic—its correlation with the equity index typically strengthens considerably.
How to hedge your strategy if BTC loses dominance or its price falls
To hedge a crypto portfolio against a sudden Bitcoin decline, more than basic diversification is required. Systemic shocks demonstrate that extreme correlations can diminish the advantages of risk spreading.
Explore derivatives
During intense panic, the futures market may trade at a significant discount to the spot price, offering opportunities for adept traders to engage in low-risk, non-directional arbitrage. This allows them to capitalize on market inefficiencies as a hedge against volatility without taking directional price exposure.
Diversify your portfolio with risk buffers
Incorporate positions in tokenized gold, real-world assets (RWAs), or fiat-backed stablecoins to safeguard portfolio value. These assets serve as liquidity reserves when the crypto markets decline.
Monitor dominance and correlation ratios
Keeping track of the short-term correlation trends of ETH and XRP to BTC can act as a timely alert that the benefits of diversification are diminishing, signaling when immediate hedging may be required.
Rebalance to yield-bearing positions
Allocate part of your holdings into staking, lending, or liquidity pools that generate yield regardless of market conditions. The consistent yield can help counteract valuation drops and enhance recovery prospects.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
