Ethereum
Crypto: Is Ethereum catching up?
Mon May 27, 2024 ▪ 7 min reading ▪ by Laetitia B.
In the past, each rise has gone through different phases stimulated by a rotation of capital. In general, Bitcoin is often the leader of the bull run and the favorite in the early stages. Following the weaker performance of Ethereum compared to bitcoin, we will focus on the factors favorable to a rotation of capital towards Ethereum.
The principle of asset rotation
In traditional finance, there are several types of asset turnover. This may involve a sector rotation (technology, industrial, financial, healthcare, etc.) or a rotation of asset types (bonds, stocks, commodities, forex, etc.). Capital moves depending on the context and the economy. Rotation can come from taking profits after a significant performance to move towards another sector or a less valued type of asset while following the economic context. This is often the case between cyclical and defensive sectors for example.
Let’s also take an example over a very long term horizon, that is to say over several decades, we can see this cyclical rotation between raw materials and the S&P500 index in the graph below:
This type of chart highlights that in the coming years, the performance of commodities should be more advantageous than that of the S&P500.
The different phases of crypto
When you look at the cryptocurrency market, there are several phases in terms of rotation, whether between bitcoin, Ethereum, large caps and altcoins. And usually that comes from a gradual rotation.
Phase 1: Bitcoin is the leader, the store of value in the crypto market. It is the oldest and most democratized in the sphere of cryptocurrencies. It is on bitcoin that the first capital inflows arrive at the start of a bull market. Since 2024, bitcoin has been available in spot ETF form, which is an advantage in stimulating demand. And at the same time, when demand is stimulated, capital inflows increase. During phase 1, Bitcoin tends to outperform Ethereum. And only when Ethereum begins to approach Bitcoin’s performance is phase 2 near. We can possibly see this rotation with the example below which highlights the ETC/BTC ratio:
Phase 2: Ethereum, which is the number 2 cryptocurrency in the cryptosphere, outperforms bitcoin. This can be seen in the chart below with the 2021 bull run.
Phase 3: It is the turn of large caps (Doge, LTC, XRP, etc.) to outperform bitcoin.
Phase 4: The altcoin season begins when there is significant capital turnover. That is, the money invested in bitcoin at the start of the bull run shifts to other cryptocurrencies, small and mid caps, and even memes. During the altcoin season, we see a reduction in Bitcoin dominance. Here is a graph that highlights this:
To better illustrate this generally, here is the timeline below:
The economic environment and the different phases of the cryptocurrency markets
The evolution of cryptocurrencies is quite cyclical, just like the economy. That is to say, we find cycles of growth and cycles of decline. Like any riskier asset class, it evolves in a favorable and accommodating context. A favorable context can be defined in several ways. For example, when growth rebounds, there is an acceleration in growth, which constitutes a favorable environment for cryptocurrencies. Consumer confidence is positive, which encourages capital inflows. Conversely, when we face an economic downturn, it is often represented by a bear market in cryptocurrencies. Each cycle often lasts on average a year and a half to two years, just like economic cycles. So, if you add up a bull market and a bear market, that’s 4 years, just like the halving process:
Another positive element for performance is also liquidity. When liquidity is abundant, cryptocurrencies thrive. For example, injections of liquidity during COVID, capital circulated more in the markets. Financial conditions have been very relaxed. Therefore, more money in circulation to buy the same good implies an increase in prices.
Regarding liquidity in the current situation, we can see the graph below highlighting the evolution of liquidity and bitcoin:
Staying in the same context, that is to say liquidity, we can also see favorable seasons (summer and autumn being the best):
Ethereum lag explained by several factors
As mentioned earlier, Ethereum often lags Bitcoin during the first few months of a bull run. This is mainly because capital first flows into bitcoin, the store of value. As for Ethereum, it is no longer the only one to be well positioned since it is closely followed by Solana. It also involves competition. That said, like bitcoin, Ethereum should benefit from greater inflows since the approval of ETFs is official. Such products imply a greater potential to attract new investors, whether for tax reasons (introduction of the product into tax-advantaged accounts) or simply because an ETF is an easily accessible product (no need to open several brokerage accounts) and inexpensive. This is why approval would be a good catalyst for bitcoin to catch up. Therefore, several arguments align in favor of Ethereum’s outperformance, such as a favorable context, new products available and the timing of the phases (as noted above).
Bitcoin or Ethereum, which one to choose?
Bitcoin and Ethereum have different strengths that can help diversify a crypto portfolio. One of the particularities of bitcoin is that it has a limited supply of 21 million, and its production is halved every 4 years. This can be considered a safe haven, especially in countries suffering from hyperinflation. Ethereum also has some special features, such as the fact that it can be used to host other cryptos and decentralized applications.
The more adoption and democratization continues with the same dynamics, the more we will be faced with new products because approvals will become easier and easier. For example, we could have an ETF bringing together Bitcoin and Ethereum to simplify the choice. This opens up many possibilities in terms of capital.
Conclusion
It can be concluded that the capital turnover system is cyclical and that Ethereum has several reasons to take the lead and outperform bitcoin for the rest of the cycle. One of the main catalysts for this development would be, as with bitcoin, the approval of ETFs. This will improve liquidity in the coming months.
Maximize your Cointribune experience with our “Read to Earn” program! Earn points for every article you read and access exclusive rewards. Sign up now and start earning benefits.
Click here to join “Read to Earn” and turn your passion for crypto into rewards!
Laetitia B.
After working for 7 years in a Canadian bank, including 5 years in a portfolio management team as an analyst, I left my position to devote myself fully to financial markets. My goal here is to democratize financial market information to the Cointribune audience on different aspects, including macro analysis, technical analysis, intermarket analysis, etc.
DISCLAIMER
The views, thoughts and opinions expressed in this article belong solely to the author and should not be considered investment advice. Do your own research before making any investment decisions.