Ethereum, the second-largest cryptocurrency by market capitalization, has been in a downtrend against Bitcoin since August 2020. This means that Bitcoin has outperformed Ethereum in terms of price appreciation over this period. However, a historical analysis suggests that Ethereum could be on the verge of entering a phase of accumulation, which could lead to a reversal of the trend.
Ethereum vs Bitcoin: A Tale of Two Cycles
Ethereum and Bitcoin are the two most dominant cryptocurrencies in the market, with a combined market capitalization of over $700 billion. However, their price movements are not always correlated. Sometimes, Ethereum follows Bitcoin’s lead, and sometimes it diverges from it.
One way to measure the relative performance of Ethereum and Bitcoin is to look at their ratio, or how much Ethereum is worth in terms of Bitcoin. This ratio can be plotted on a chart to show the historical trends and patterns.
The chart below shows the Ethereum/Bitcoin ratio since 2018, along with three distinct phases that can be identified:
- Descending channel: This is a bearish pattern that shows lower highs and lower lows, indicating that Ethereum is losing value against Bitcoin over time. This phase lasted from August 2020 to October 2023, and saw Ethereum drop from 0.04 BTC to 0.02 BTC.
- Accumulation phase: This is a sideways pattern that shows price stabilization and consolidation, indicating that investors are accumulating Ethereum at low prices and preparing for a change in momentum. This phase lasted from October 2023 to December 2023, and saw Ethereum fluctuate between 0.02 BTC and 0.025 BTC.
- Ascending channel: This is a bullish pattern that shows higher highs and higher lows, indicating that Ethereum is gaining value against Bitcoin over time. This phase started in January 2024, and saw Ethereum rise from 0.025 BTC to 0.03 BTC.
What Drives the Ethereum/Bitcoin Ratio?
The Ethereum/Bitcoin ratio is influenced by various factors, such as supply and demand, market sentiment, innovation, adoption, regulation, competition, and more. Some of the possible drivers of the ratio are:
- Market cycles: Cryptocurrencies tend to move in cycles that are influenced by macroeconomic factors, such as inflation, interest rates, monetary policy, etc. These cycles can be divided into four stages: expansion, peak, contraction, and trough. During expansion and peak stages, investors tend to favor riskier assets with higher potential returns, such as Ethereum. During contraction and trough stages, investors tend to favor safer assets with lower volatility, such as Bitcoin.
- Network effects: Cryptocurrencies benefit from network effects, which means that the more users, developers, applications, and transactions they have, the more valuable they become. Ethereum has a strong network effect due to its smart contract functionality, which enables the creation of decentralized applications (DApps) on its platform. Bitcoin also has a network effect due to its first-mover advantage and brand recognition. However, Ethereum’s network effect could be stronger than Bitcoin’s due to its faster innovation and adoption rate.
- Technological developments: Cryptocurrencies are constantly evolving and improving their technology to enhance their performance, security, scalability, usability, etc. Ethereum is undergoing a major upgrade called Ethereum 2.0, which aims to transition from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) consensus mechanism. This will make Ethereum more energy-efficient, faster, cheaper, and more secure. Bitcoin is also working on improving its technology through initiatives such as Taproot, which will enhance its privacy, scalability, and functionality.
What Does the Future Hold for Ethereum and Bitcoin?
The future of Ethereum and Bitcoin is uncertain and depends on many factors that are hard to predict. However, based on the historical analysis of the last cycle, it seems that Ethereum could be ready for a reversal against Bitcoin soon.
The last cycle lasted from September 2019 to February 2020 and followed a similar pattern as the current cycle. Ethereum was in a descending channel against Bitcoin for 17 months before entering an accumulation phase for five months. Then it entered an ascending channel for seven months before reaching a peak.
If we assume that the current cycle will follow the same duration and magnitude as the last cycle (which is not guaranteed), then we can expect that:
- The accumulation phase will last until December 2023
- The ascending channel will last until July 2024
- The peak will be reached at around 0.06 BTC
Of course, these are only rough estimates based on historical trends and do not account for other factors that could affect the market. Therefore, investors should always do their own research and analysis before making any decisions.
