Why The Ethereum To Bitcoin Ratio Matters

 

Why The Ethereum To Bitcoin Ratio Matters

by Taki Tsaklanos from InvestingHaven.com

The price of Ethereum largely recovered from its 40 percent correction on Thursday.  Ethereum was trading at $360 on Wednesday, got smashed to $256 on Thursday, and is now back above $360.  This is typical behavior in cryptocurrency land: strong sell offs in a very short period of time, followed by new highs one week after.  We believe Ethereum will be trading at new all-time highs at the end of June.  Because of that we stick to our long term Ethereum forecast of $1000.

When it comes to understanding the outperforming cryptocurrencies most writers look at the market cap.  For instance, according to Coinmarketcap Bitcoin has a market cap of $42B while Ethereum stands at $33B.  Early this year Ether has a market cap of $4B.

In our view the market cap comparison does not reflect the best way to look at cryptocurrencies.  What is valuable as an indicator is relative strength, for instance the Ethereum to Bitcoin price ratio.  That stems from analysis in traditional markets.  When analyzing traditional markets we look at the gold to silver ratio to identify which of the two is outperforming or to understand whether a bull market has started or ended.  In stock markets the S&P 500 to Russell 2000 ratio is popular as a gauge of risk (the small cap Russell typically outperformers when investors are in ‘risk on’ mode).

When we look at the two biggest cryptocurrencies, Bitcoin and Ethereum, it is worth analyzing the Ethereum to Bitcoin price ratio. It is shown on the following chart:  http://ethereumprice.today/wp-content/uploads/2017/06/ethereum-to-bitcoin-price-chart.png

This ratio tells that Ethereum’s relative strength dipped in January of this year. However, as of that moment, it went up almost in one straight line.

It moved to an “all-time high” right when it crossed the horizontal red line annotated on the chart.  In chart analysis terms we call it a “breakout.” As goes with most breakouts it tends to come back down to test the breakout point before moving higher as of that point. That is called a “confirmation of the breakout” so it suggests that the uptrend will continues.

In May, the Ethereum to Bitcoin ratio crossed the other red line, see green circle. That is when the acceleration of Ethereum’s outperformance started.

Why is this important? Because it shows the outperforming cryptocurrency. Similar to the gold to silver ratio, it is great to know as an investor if Ethereum is the stronger cryptocurrency compared to Bitcoin which is considered a reference point as it was the first cryptocurrency to become big and is the most well known cryptocurrency currently.

Likewise, readers can do their own research by looking at other ratios: think of the Ethereum to Ripple ratio, the Ethereum to Litecoin ratio, and the likes.

Relative strength tells much more than absolute prices, investors have to make use of it.

Note that this ratio does not suggest anything about the future price of Ethereum or Bitcoin.

About the author

Taki Tsaklanos

Lead analyst Taki Tsaklanos from InvestingHaven.com