The relationship between Bitcoin and Ethereum is undergoing a move not seen since April 2021 — potentially causing a big move for the world's second-largest cryptocurrency.
Cryptocurrency like Bitcoin (Cryptocurrency: BTC) Since Election Day, it has completely taken off. Investors are betting that a relaxed, more friendly regulatory environment under the Trump administration will continue to push the sector to new highs. Moreover, with more exposure to cryptocurrencies than ever before, many see Bitcoin as a potential hedge against inflation, which could still be an issue next year. Ethereum (Crypto: ETH)is the second largest cryptocurrency in the world and has an interesting relationship with Bitcoin. Although the two are not the same, they are often grouped together because they are considered pioneers in the sector. The relationship between Bitcoin and Ethereum is showing signs of movement not seen since April 2021, and could spark a major move for Ethereum.
Given their history and the fact that cryptocurrencies are difficult to value as they have no intrinsic value, many investors have been looking at Ethereum and Bitcoin price trends. After all, groups of stocks are often compared to each other to determine their relative valuations. An easy way to track Bitcoin and Ethereum is to look at the relationship between Ethereum and Bitcoin prices by dividing the Ethereum price by the Bitcoin price. Seeing how this ratio trends over time can provide clues as to whether one is undervalued or overvalued relative to the other.
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Data source: TradingView. Graph by author.
As you can see from the chart, the Ethereum to Bitcoin ratio recently fell towards 0.035, its lowest level since April 2021. The average ratio dating back to 2020 is 0.0538. Ethereum has performed well since election day, gaining about 38% compared to Bitcoin's 44%. However, Bitcoin has significantly outperformed this year.
Bitcoin price data by YCharts
Cryptocurrencies have held up fairly well during uncertain times and a high interest rate environment, where until recently investors were far more concerned about inflation and whether it would slow. Bitcoin has held up surprisingly well as investors have grown confident that it can hedge against inflation due to its limited supply.
Going back to the Ethereum to Bitcoin ratio, the last time it fell to this level, Ethereum recovered 120% over the next two months. Bitcoin and Ethereum trade around the clock, so it's clear that things can change quickly. On November 30th, this ratio was 0.380, so Ethereum has already started to close the gap a little.
Of course, past trends are not necessarily indicative of future success. As you can see from the chart above, the Ethereum-to-Bitcoin ratio has declined before, and may continue to decline now.
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However, I think the recent trends in the Ethereum/Bitcoin ratio are set in Ethereum's favor, especially if the crypto rally continues. Markets and sectors tend to expand over time, as we've seen with the stock market this year. A big part of cryptocurrencies has always been emotion. Bitcoin and the market have risen significantly, but it usually takes a while for sentiment to peak and then fall again. I think positive sentiment towards cryptocurrencies has not yet reached its peak. Improvements in the regulatory environment could provide a tailwind that continues into 2025, and the more cryptocurrencies rise, the more large-scale investors will be forced to chase them.
Ethereum does not hedge against inflation like Bitcoin, but it does provide value in other ways. The relatively new proof-of-stake method for validating transactions is much more energy efficient than Bitcoin. Developers see Ethereum as a leading network for creating decentralized applications and non-fungible tokens, and its smart contract capabilities have the potential to be used in many industries.
In my opinion, Bitcoin and Ethereum are long-term stable crypto assets, so I think both will continue to do well. However, it is very difficult to predict short-term price movements for cryptocurrencies, but given Bitcoin's already impressive rise, it is possible that the rise could spread to other tokens such as Ether.
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Bram Berkowitz has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
Bitcoin-Ethereum relationship is doing something not seen since April 2021 — could spark a big move for the world's second-largest cryptocurrency Originally published by The Motley Fool
