What is Heart's Law and Why Is It Important?

Cryptocurrencies like ETH and BTC, are often thought of as competitors.

Many traders even attempt to diversify their portfolios by holding both assets.

When it comes to their price, however, these two cryptocurrencies often move in lockstep with each other.

This paradox can be explained, partly, by Heart’s Law.

What is Heart’s Law?

Heart's Law, as coined by Richard Heart, suggests that the prices of cryptocurrencies tend to move together because they are bonded by liquidity and trading pairs.

Cryptocurrencies such as Bitcoin and Ethereum, for example, often rise and fall simultaneously due to their trading pairs. When one goes up, it pulls the other up because they can be exchanged for each other.

Heart's Law challenges the idea that cryptocurrencies move in tandem due to some overarching strategy or manipulation, instead emphasizing the influence of trading liquidity.

Additionally, it accounts for the fact that stablecoins can allow cryptocurrencies to be less correlated. This is because, when more liquidity is sourced from stablecoins, the price movements of other speculative assets can have less of an impact.

Examples of Heart’s Law 

Heart’s Law for ETH/BTC

The best example of Heart’s Law is the price correlation between ETH and BTC.

Since May of 2021, ETH and BTC have moved nearly in lock step, fluctuating between 12 ETH per BTC to 20 ETH per BTC. 

The correlation between these cryptocurrencies is due in large part to their bonded liquidity. 

This single Uniswap pair alone holds over $100 million USD worth of BTC and ETH, on either side.

This is just one of this trading pair’s dozens of thick liquidity pools on other centralized and decentralized exchanges.

Heart’s Law for PLS/PLSX

PulseChain (PLS) and PulseX (PLSX) have seen very similar price action despite competing for the same economic energy.

In the first 8 months of PulseChain’s existence, the price of PLSX has fluctuated between 0.25 and 0.45 PLS per PLSX.

This can also be largely explained as a result of the high liquidity between PLS and PLSX (over $60 million USD).

Is Heart’s Law Infallible?

Heart’s Law implies that the interconnectedness of cryptocurrencies through trading pairs plays a crucial role in their collective movements.

It simply means that when one crypto goes up in price, the other one will likely go up too–and vice versa.

Since ETH and BTC have the most liquidity to each other and just about every other crypto, they act as somewhat of a measuring stick for the entire industry.

But bonded liquidity alone does not guarantee price correlation. The crypto market can, at times, be nothing short of unpredictable.

In addition, the degree to which prices will correlate also depends on the sizes of the liquidity pools. A pair with $100 million in liquidity, for instance, will be much more correlated than a pair that only has a fraction of that.

However, as a greater percentage of liquidity becomes less reliant on traditional crypto in favor of stablecoins, we could see crypto assets begin to have less of a price impact on their peers.